Center for Law and Economic Studies | Columbia Law School
Working Papers 161-170
161. Pathways to Corporate Convergence? Two Steps on the Road to Shareholder Capitalism in Germany: Deutsche Telekom and DaimlerChrysler (Gordon, Jeffrey N.) January 31, 2000 Published in Columbia Journal of European Law, Vol. 5, No. 219, Spring 1999 (Symposium Issue)
A central question in the corporate convergence debate is the extent to which parties will settle on a shareholder capitalism model, in which managerial accountability will be measured against a public shareholder wealth maximization criterion. The paper evaluates two particular events for the impact on German corporate governance: the privatization of Deutsche Telekom and the cross-border merger between Daimler Benz and Chrysler Corp. The Deutsche Telekom transaction had symbolic impact, because it made many Germans shareholders for the first time, but the terms of the transaction substantially protected these shareholders against equity risk and deprived them of governance rights. The DaimlerChrysler merger, on the other hand, is a major event in governance convergence because it should inject a substantial element of US-style shareholder activism into the governance of a major German corporation. The paper identifies several elements, including: the change in the shareholder body through a dilution of traditional German holders and the addition of U.S. institutional investors, the pioneering of a template for subsequent cross-border mergers involving German firms, the flexibility of German corporate law to shareholder initiatives, and the likely rippling impact of governance changes at DaimlerChrysler on other major German corporations. Working Paper No.161.pdf
162. Harmful Remedies: Optimal Reformation of Anti-Competitive Contracts (Gal, Michal S.) March 31, 2000
Current law and economics literature identifies two main types of errors courts can make in applying antitrust law. Courts may erroneously label a conduct as anti-competitive although competition is not harmed. Alternatively, courts may fail to identify anti-competitive conduct and thus fail to attack it. This article focuses on a third possible error where a court identifies, correctly, anti-competitive conduct but its mode of interference, its proscribed remedy, harms competition. It analyzes such error in the context of anti-competitive contract reformation. Such error occurs, for example, where a court has chosen a reformation option that is less efficient and effective than an alternative reformation option. Accordingly, this article identifies a set of clear and coherent principles for contract reformation in order to eliminate, or at least reduce, the occurrence of the third error. The analysis moves beyond the received wisdom that contract reformation should simply sever the anti-competitive parts of a contract if so doing does not alter the nature of the contract, and suggests that in most cases courts should invalidate the contractual relationship in its entirety. Working Paper No.162.pdf
163. Reducing Rivals' Prices: Government - Supported Mavericks as New Solutions for Oligopoly Pricing (Gal, Michal S.) April 30, 2000
One of the most important market imperfections in modern capitalism and surprisingly one of the most under-regulated is oligopoly pricing (conscious parallelism). Only few suggestions have been made over the years to regulate oligopoly pricing. All suggestions pose serious obstacles to their efficient application. Accordingly, oligopoly pricing is not regulated. It is left to the workings of the market (or pure luck), while acknowledging the market's limited regulatory force. This article proposes a novel method for regulating oligopoly pricing by way of introducing a government-supported maverick into an oligopolistic industry for a limited time. The maverick will price its products at competitive or near-competitive levels, based on considerations of consumer or total welfare. Its rivals will follow its pricing strategy, or incur significant losses and possibly exit the market. As will be shown, the proposal may significantly reduce allocative inefficiency by reducing the welfare losses from supra-competitive pricing. The threat of intervention might be sufficient, in itself, to reduce the problem of oligopoly pricing. It may also reduce productive inefficiency by combating the problem of inefficient plant and firm sizes. This article analyzes the market conditions that must exist for this proposal to be operational and points to its benefits as well as its costs and limitations. Working Paper No.163.PDF
164. Economic Reasoning and the Framing of Contract Law: Sale of an Asset of Uncertain Value (Goldberg, Victor P.) February 29, 2000
By analyzing two American contract law decisions, the paper illustrates the usefulness of economic analysis in framing the inquiry. The cases have a common feature, unrecognized by the courts: they both deal with the production and transfer of information regarding the sale of an asset of uncertain value. One involves the combination of an option and a lockup to encourage the buyer to produce information. The other involves contingent compensation to convey the seller's assurance of the quality of the assets. Once this is recognized, the outcomes are straightforward. Working Paper No.164.pdf
165. The Limits of Discipline: Ownership and Hard Budget Constraints in the Transition Economies (Frydman, Roman, Cheryl Gray, Marek Hessel and Andrzej Rapaczynski) February 1999
This paper, based on a large sample of mid-sized manufacturing firms in the Czech Republic, Hungary and Poland, argues that the imposition of financial discipline is not sufficient to remedy ownership and governance-related deficiencies of corporate performance. The study offers three main conclusions. First, we find that state enterprises represent a higher credit risk both because of their inferior economic performance and because of their lesser willingness or propensity to meet their payment obligations. Second, the brunt of the state firms' lower creditworthiness is borne by their state creditors, as state enterprises deflect the higher risk away from private creditors. Third, this transfer of risks from private to state creditors is possible because state creditors impose significantly "softer" financial discipline on state firms. Inasmuch as such softness may reflect unwillingness to accept a likely demise of a large number of state firms that are in principle capable of successful restructuring through ownership changes, we conclude that the imposition financial of financial discipline is not sufficient to remedy ownership and governance-related deficiencies of corporate performance. Working Paper No.165.PDF
166. Does Venture Capital Require an Active Stock Market? (Black, Bernard S. and Ronald J. Gilson) Published in Journal of Applied Corporate Finance, pp. 36-48, Winter 1999
The United States has both an active venture capital industry and well-developed stock markets. Japan and Germany have neither. We argue here that this is no accident -- that venture capital can flourish especially -- and perhaps only -- if the venture capitalist can exit from a successful portfolio company through an initial public offering (IPO), which requires an active stock market. Understanding the link between the stock market and the venture capital market requires understanding the contractual arrangements between entrepreneurs and venture capital providers especially the importance of exit by venture capitalists and the opportunity, present only if IPO exit is possible, for the venture capitalist and the entrepreneur to enter into an implicit contract over control, in which a successful entrepreneur can reacquire control from the venture capitalist by using an IPO as the means of exit. Working Paper No.166 .PDF
167. The Dark Side of Private Ordering: An Institutional and Empirical Analysis of Organized Crime (Milhaupt, Curtis J. & Mark D. West) Published in University of Chicago Law Review, Vol. 76, p. 41, 2000
This Article provides theoretical and empirical support for the claim that organized crime competes with the state to provide property rights enforcement and protection services. Drawing on extensive data from Japan, this Article shows that, like firms in regulated environments everywhere, the structure and activities of organized criminal firms are significantly shaped by state-supplied institutions. Careful observation reveals that in Japan, the activities of organized criminal firms closely track inefficiencies in formal legal structures, including both inefficient substantive laws and a state-induced shortage of legal professionals and other rights-enforcement agents. Thus, organized crime in Japan--and, by extension, in other countries where significant gaps exist between formal property rights structures and state enforcement capacities--is the dark side of private ordering.
Regression analyses show negative correlations between membership in Japanese organized criminal firms and (a) civil cases, (b) bankruptcies, (c) reported crimes, and (d) loans outstanding. We interpret these data to support considerable anecdotal evidence that members of organized criminal firms in Japan play an active entrepreneurial role in substituting for state-supplied enforcement mechanisms and other public services in such areas as dispute mediation, bankruptcy and debt collection, (unorganized) crime control, and finance. We offer additional empirical evidence indicating that arrests of gang members do not curb the growth of organized criminal firms. These findings may have a significant normative implication for transition economies: efforts to eradicate organized crime should focus on the alteration of institutional incentive structures and the stimulation of competing rights-enforcement agents rather than on traditional crime-control activities. This paper available through Chicago Law Review Working Paper No.167.pdf
168. Competing on Quality of Care: Developing a Competition Policy for Health Care Markets (Sage, William M. & Peter Hammer) Published in University of Michigan Journal of Law Reform, Vol. 32, No. 4, pp. 1069-1118, 1999
As American health care moves from a professionally dominated to a market-dominated model, concerns have been voiced that competition, once unleashed, will focus on price to the detriment of quality. Although quality has been extensively analyzed in health services research, the role of quality in competition policy has not been elucidated. While economists may theorize about nonprice competition, courts in antitrust cases often follow simpler models of competition based on price and output, either ignoring quality as a competitive dimension or assuming that it will occur in tandem with price competition. This unsystematic approach is inadequate for the formulation of policy in the health care industry, where quality is a central concern of both consumers and society. Instead, courts need a framework with which to analyze the implications for quality of various market structures and to understand the welfare implications of proposed market changes. A competition policy would seek to evaluate the potential for private markets to protect and improve quality in the health care system. This article examines the present influence of antitrust law on price-quality and quality-quality tradeoffs in health care, explores the issues that would be confronted in developing a true competition policy and outlines a research agenda that would begin to accomplish that task. Working Paper No.168.pdf
169. Expanding Managed Care Liability: What Impact on Employment-based Health Coverage? (Studdert, David M., William M. Sage, Carole R. Gresenz & Deborah R. Hensler) Published in Health Affairs, Vol. 18, November/December 1999
Policymakers are considering legislative changes that would increase the exposure of managed care organizations to civil litigation for withholding coverage or failing to deliver needed care. Using a combination of empirical information and theoretical analysis, we assess the likely responses of health plans and ERISA plan sponsors to an expansion of liability, and evaluate the policy impact of those moves. We conclude that the direct costs of liability are uncertain, but that the threat of litigation may have other important effects on coverage decision-making, information exchange, risk contracting, and the willingness of employers to continue active involvement in health coverage. Before legislators turn up the legal heat on managed care organizations, they should carefully consider the broader implications of global warming in the health care system. Working Paper No.169.pdf
170. Regulating Through Information: Disclosure Laws and American Health Care (Sage, William M.) Published in Columbia Law Review, November 1999
Efforts to reform the American health care system through direct government action have failed repeatedly. This article evaluates an alternative strategy that has emerged from these experiences: requiring insurance organizations and health care providers to disclose information to the public. Mandatory disclosure laws have become a focal point of current health care regulation, particularly as a response to the growth of managed care. The article traces the current popularity of disclosure laws to several developments, ranging from technical advances in health policy research to changes in social attitudes towards government. The article identifies four arguments for mandatory disclosure in health care, associates each with evolving trends in the law, and analyzes their implications for public policy. The article reveals that the most commonly articulated goal of disclosure laws, improving the efficiency of private purchasing decisions by giving purchasers complete information about price and quality, is the most complicated operationally. Other justifications for disclosure laws hold greater promise, but make different, sometimes conflicting assumptions about sources and uses of information. For example, using disclosure to ensure that intermediaries upon whom patients and consumers rely are in fact serving their interests suffers from potentially crippling ambiguities because agency relationships in health care are not limited to contractable matters. Similarly, public disclosure can stimulate innovation and improve the performance of the health care system in achieving organizational and national goals, but setting those goals implies influencing rather than honoring consumer preferences. Finally, although information can expose to democratic deliberation the social tradeoffs implicit in current health policy -- including public investment and procedural fairness -- the welfare consequences of transparency are indeterminate. The lessons that emerge from the article's analysis have implications not only for health care, but for other regulated practices and industries. This paper available through Columbia Law Review Columbia Law Review