Center for Law and Economic Studies | Columbia Law School

Fall 2011 Workshops

Law and Economic Studies

September 19, 2011

John J. Donohue, III
C. Wendell and Edith M. Carlsmith Professor of Law, Stanford Law School

"Rethinking America's Illegal Drug Policy"
Authored with Benjamin Ewing & David Peloquin

Abstract
The social costs of both legal and illegal recreational drugs are immense.  Alcohol, illegal drugs, and tobacco each impose annual total social costs at or above $200 billion.  Most of the social costs for the illegal drugs stem from the burdens of criminal enforcement, while the social costs of the legal substances largely follow more proximally from abuse and dependency. 
 
Longstanding, nation-wide criminalization has made it difficult to disentangle the toxicological effects of illegal recreational drugs from the social consequences endemic to criminalization. This paper provides a critical review of the empirical and theoretical literatures on illegal drug policy, with special focus on cross-country comparisons, in order to evaluate three drug policy regimes:  1) criminalization (prohibition of sale and possession, backed by sanctions including incarceration); 2) legalization (taxation and regulation of sale and possession); and 3) “depenalization” (prohibition of sale and possession, with sanctions for possession limited to fines or treatment, and specifically excluding incarceration).
 
Drawing on the experiences of various states, as well as countries such as Portugal and the Netherlands, this chapter attempts to identify cost-minimizing policies for marijuana and cocaine, assessing the differing ways in which the various drug regimes would likely change the magnitude and composition of the social costs of each of these illegal drugs. A central question for drug policy is: how would each alternative regime affect the magnitude of toxicologically-induced social costs as compared with the social costs of crime that are systemic to drug criminalization? In addressing that question, the chapter updates and evaluates Jeffrey Miron’s 1999 national-time series analysis of drug prohibition spending and the homicide rate, which underscores the lack of a solid empirical base for assessing the theoretically anticipated crime drop that would come from drug legalization.  Nonetheless, given the number of arrests for marijuana possession and the costs of incarceration and crime systemic to cocaine criminalization, the current regime is unlikely to be cost-minimizing for either marijuana or cocaine.
http://www.nber.org/papers/w16776
Donohue Comments - Fall 11 WS

October 3, 2011

J.J. Prescott
Professor of Law, University of Michigan Law School

"Trial and Settlement:  A Study of High-Low Agreements,"
Authored with Kathryn E. Spier and Albert Yoon

Abstract
This paper presents the first systematic theoretical and empirical study of high-low agreements in civil litigation. A high-low agreement is a private contract that, if signed by litigants before the conclusion of a trial, constrains any damages payment to a specified range. Whereas existing work describes litigation as a choice between trial and settlement, our examination of high-low agreements—a relatively new phenomenon in civil litigation—introduces partial or incomplete settlements. In our theoretical model, trial is both costly and risky. When litigants have divergent subjective beliefs and are mutually optimistic about their trial prospects, cases may fail to settle. In these cases, high-low agreements can be in litigants’ mutual interest because they limit the risk of outlier awards while still allowing an optimal degree of speculation. Using claims data from a national insurance company, we describe the features of these agreements and empirically investigate the factors that may influence whether litigants discuss or enter into them. Our empirical findings are consistent with the predictions of the theoretical model. We also explore extensions and alternative explanations for high-low agreements, including their use to mitigate excessive, offsetting trial expenditures.
Prescott, JJ - Fall 11 WS

October 17, 2011

Jonathan Masur
Assistant Professor of Law and Herbert and Marjorie Fried Teaching Scholar, University of Chicago

"Patent Inflation"

Abstract
In recent years, both the Patent and Trademark Office (PTO) and the Federal Circuit have received trenchant criticism for their handling (and mishandling) of patent applications and patent cases. Critics have leveled two particular charges: first, that the PTO grants too many invalid patents; and second, that the Federal Circuit has presided over a dramatic (and unwarranted) expansion of what can be patented. These failures have been chalked up to a number of potential causes: funding shortfalls at the PTO; internal management problems at the PTO; a lack of expertise at the PTO or the Federal Circuit; capture by private interests; and, perhaps most importantly, a simple ideological preference for greater numbers of patents over a broader range of technologies.

It is entirely possible that these various factors, singly and in combination, have contributed to the granting of significant numbers of invalid patents granted and the expansion in patentability. Yet this Article intends to suggest another possibility. These two phenomena—an overly permissive PTO, and an overly expansive Federal Circuit—may simply be the results of the contorted institutional relationship between the two organizations. Because of the manner in which patent cases make their way from the PTO to the Federal Circuit, the PTO may have a decided institutional interest in granting more patents than it should. And because of this same interaction, the Federal Circuit may be engaged in an unwitting expansion of the boundaries of patent law.

The key lies with the asymmetric nature of appeals from the PTO to the Federal Circuit. When the PTO denies a patent application, the aggrieved private party may appeal immediately to the Federal Circuit. When the PTO grants a patent, however, there is no losing party to appeal—the victorious applicant merely walks away with its patent. That patent is unlikely ever to see the inside of a courtroom, given how few infringement lawsuits are litigated, and at minimum it will be many years before it does. If the PTO wishes to avoid lawsuits, it need only err on the side of allowing more patents. And if the Federal Circuit is fed a steady diet of boundary-stretching patent cases, it will tend to inflate the boundaries of patentability purely through error and happenstance. The patent law will thus be subject to a natural inflationary pressure
Masur - Fall 11 WS Paper

October 31, 2011

D. James Greiner
Assistant Professor of Law, Harvard Law School

"How Effective Are Limited Legal Assistance Programs:
A Randomized Experiment in a Massachusetts Housing Court,"
Authored with Cassandra Wolos Pattanayak and Jonathan Hennessy

Abstract
We persuaded entities conducting two civil Gideon pilot programs to randomize which potential clients would receive offers of traditional attorney-client relationships from professional service provider staff attorneys and which would receive referrals to only limited (``unbundled'') assistance.  In both pilot programs potential clients were occupants in housing eviction proceedings, and both programs were oversubscribed.   In this article, we report the results of one of the two resulting randomized control trials, which we label the ``Housing Court Study,'' after the type of the court in which it took place.  In the Housing Court Study, all study-eligible potential clients could (and most did) receive assistance in filling out answers and discovery requests. In addition, occupants not offered a traditional attorney-client relationship from the provider's staff attorneys, i.e., the control group, received a referral to that provider's lawyer for the day program.  The lawyer for the day program provided same-day-only representation in hallway settlement negotiations and mediation sessions but not in court appearances or in filing motions.  We analyze the intention-to-treat effect, meaning we focus on the effect of the provider's offer of full representation vis-a-vis the referral to the lawyer for the day program.  In doing so, we evaluate the relative effectiveness of two types of programs a legal services provider might adopt.
 
We find no statistically significant evidence that the service provider's offer of full, as opposed to limited, representation had a large (or any) effect on the likelihood that the occupant would retain possession, on the financial consequences of the case, on judicial involvement in or attention to cases, or on any other litigation-related outcome of substantive import.  To the contrary, treated and control group point estimates are close to one another.  In addition, because about half of the potential clients in this program had contacted the service provider before litigation had been initiated, we are able to study whether the provider's offer of full representation kept disputes out of court, although the limited size of the dataset made possible detection of only very large effects.  We find no evidence of such very large effects.
 
We explore several possible interpretations of our results, and we caution against both over-interpretation and under-interpretation
Paper not available for posting or citing at this time.

November 14, 2011

Allen Ferrell
Harvey Greenfield Professor of Securities Law, Harvard Law School

"Thirty Years of Shareholder Rights and Firm Valuation,"
Authored with Martjn Cremers

Abstract
This paper introduces a new hand-collected shareholder rights dataset tracking approximately 1,000 firms’ G-index scores over 1978-1989. In conjunction with the 1990-2006 IRRC data, we track firms’ shareholder rights over thirty years. Most governance changes occurred during the 1980s. We find a robustly negative association between the G-Index and Tobin’s Q. The negative association between fewer shareholder rights and firm value only appears after the judicial approval of the poison pill in the landmark Delaware Supreme Court decision of Moran v. Household in 1985. This decision was an unanticipated, exogenous shock to shareholder rights, suggesting a causal impact of shareholder rights on firm valuation.
Ferrell A - Fall 11 WS

November 28, 2011

Roberta Romano
Sterling Professor of Law and Director, Yale Law School Center for the Study of Corporate Law

"For Diversity in the International Regulation of Financial Institutions:
Rethinking the Basel Architecture"

Abstract
This paper challenges the prevailing view of the efficacy of harmonization of international financial regulation and provides a mechanism for facilitating regulatory diversity within the Basel Accords framework.  Recent experience suggests that regulatory harmonization may increase, not decrease, systemic risk.  By incentivizing financial institutions worldwide to follow broadly similar business strategies, regulatory error can lead to global institutional failure.  Furthermore, the fast-moving, dynamic nature of financial markets renders it improbable that regulators can predict with any confidence what optimal capital requirements or other regulatory policies are to reduce systemic risk, the objective of global harmonization efforts, nor what future categories of activities or institutions might generate systemic risk, for a rule appropriate in a current context may not be appropriate for a future one, as technological, economic and legal conditions change, and as the behavior of regulated firms changes in an unanticipated manner in response to regulation.  As a consequence, there are bound to be regulatory mistakes, both large and small.  Moreover, an internationally-harmonized regime impedes the acquisition of knowledge concerning the comparative effectiveness of differing regulatory arrangements, as nations are discouraged from experimenting with alternative regulatory approaches.
 
The paper contends, accordingly, that there is both value in and a need to increase the flexibility of the international financial regulatory architecture and advocates, as a means of implementing that goal, permitting regulatory diversity and experimentation within the existing Basel framework.  It proposes making the Basel regime more adaptable by creating a mechanism by which departures in multiple directions and dimensions from Basel’s strictures would not only be permitted but would be encouraged, while providing safeguards, given the limited knowledge that we do possess, against the ratchetting up of systemic risk.  The core of the proposal is peer review of proposed deviations from Basel, and ongoing monitoring of departures, for their impact on global systemic risk.  Such an approach would both improve the quality of regulatory decisionmaking by providing information about what regulation works best under what circumstances and a safety valve against regulatory errors’ increasing systemic risk, by reducing the likelihood that all international banks will be following a flawed strategy.
 Romano, R - Fall 11 WS