Center for Law and Economic Studies | Columbia Law School

Fall 2012 Workshops

September 24, 2012

Viral V. Acharya
C.V. Starr Professor of EconomicsDepartment of Finance, NYU Stern School of Business
Research Associate in Corporate Finance, National Bureau of Economic Research

“Are Banks Passive Liquidity Backstops?  Deposit Rates and Flows During the 2007-2009 Crisis,” Authored with Nada Mora

Abstract
Can banks maintain their advantage as liquidity providers when they are heavily exposed to a financial crisis? The standard argument - that banks can - hinges on deposit inflows that are seeking a safe haven and provide banks with a natural hedge to fund drawn credit lines and other commitments. We shed new light on this issue by studying the behavior of bank deposit rates and inflows during the 2007-09 crisis. Our results indicate that the role of the banking system as a stabilizing liquidity insurer was disrupted in the first year of the crisis as aggregate deposit inflows weakened and loan to deposit shortfalls widened. Moreover, individual banks losing deposits and with increasing shortfalls were also those most exposed to liquidity demand shocks (as measured by their unused commitments). Such liquidity-short banks sought to attract deposit by offering higher rates. The results show that banks are not passive recipients of deposits, but in fact, active seekers, in financial crises when banks are themselves stressed.
Acharya, Viral V - 2012 Fall WS.pdf

October 8, 2012

Darius Palia
Professor, Finance & Economics DepartmentRutgers Business School-Newark and New Brunswick

“Analysis of Discrimination in Prime and Subprime Mortgage Markets,”Authored with R. Glenn Hubbard, and Wei Yu

Abstract
This paper examines evidence of lending discrimination in prime and subprime mortgage markets in New Jersey. Existing single-equation studies of race-based discrimination in mortgage lending assume race is uncorrelated with the disturbance term in the loan denial regression. We show that race is correlated with both observable and unobservable risk variables, leading to biased coefficient estimates. To mitigate this problem, we specify a system of equations and use a full information maximum likelihood (FIML) method and two-stage least squares (2SLS). We identify a valid and strong instrumental variable for race, namely, the number of Black church members at the county-level. Both FIML and 2SLS show that minorities are more likely to be rejected than whites in the prime market, but less likely to be rejected than whites in the subprime market, results supportive of the information-based theory of discrimination. We also find that the reduction in rejection rates to minority neighborhoods from 1996 to 2008 cannot be fully justified by risk, suggesting a relaxation of lending standards to minority neighborhoods. Using the methodology of Mian and Sufi [2009], we also find evidence for strong credit supply effects.
Palia, D - Fall WS.pdf

October 22, 2012

Mark R. Patterson
Professor of LawFordham University School of Law

“Google and Search-Engine Market Power”

Abstract
A significant and growing body of commentary considers whether possible manipulation of search results by Google could give rise to antitrust liability. Surprisingly, though, little serious attention has been paid to whether Google has market power. Those who favor antitrust scrutiny of Google generally cite its large market share, from which they infer or assume its dominance. Those who are skeptical of competition law’s role in regulating search, on the other hand, usually cite Google’s "competition is only a click away" mantra to suggest that Google’s market position is precarious. In fact, the issue of Google’s power is more complicated and interesting than either of these approaches suggests.

The commentary on Google has not focused on information as a product and generally has not considered the ways in which it differs from other products. One important characteristic of information products is that output generally can be expanded at low cost.  As a result, restriction of output is not typically an effective way to exploit power, which makes market share an inappropriate measure of power.  A second key characteristic is presented by Arrow’s paradox regarding information: "its value for the purchaser is not known until he knows the information, but then he has in effect acquired it without cost." In many instances of search, a consumer will be seeking information only in circumstances in which she will be unable to evaluate the quality of the information she receives. Significantly, this is the case for the search information offered by many of the firms who have complained about Google's practices; these competitors are so-called "vertical search engines" that offer information about products and prices in particular markets.  Consumers searching for such information often will not have prior information against which to compare the information they are receiving, which makes it plausible that Google could manipulate the results it provides. This lack of transparency in quality can give an information provider market power, just as can an absence of transparency in price for other products.  A method for measuring the magnitude of this sort of power is offered, focusing on the prices charged for placement in the results of Google's AdWords advertising program.
Patterson, R - 2012 Fall WS.pdf

November 5, 2012

Jennifer H. Arlen
Norma Z. Paige Professor of LawNew York University School of Law

“Corporate Governance Regulation Through Non-Prosecution”Authored with Marcel Kahan

Abstract
This article examines prosecutors’ use of pretrial diversion agreements to exercise of quasi-regulatory authority over firms with detected wrongdoing through the use of pretrial diversion agreement to require firms to alter the compliance programs, internal governance, and to accept additional external oversight. While various economic justifications have been given for such mandates, including corporate asset insufficiency, we find that these mandates are justifiable in only one situation: when serious agency cost problems afflict corporate policing. This justification not only restricts when mandates should be imposed but also the type of mandates that should be imposed. Specifically, we find that DPA mandates must be targeted a policing agency costs. Thus, generally mandates should incorporate provisions shifting responsibility over policing to actors not afflicted by policing agency costs (internal or external). By contrast, DPAs should not mandate generic compliance programs or corporate governance reforms that do not address policing agency costs.
Arlen, J - 2012 Fall WS.pdf
 

November 19, 2012

Tom Baker
William Maul Measey Professor of Law and Health SciencesUniversity of Pennsylvania Law School

“Protecting Consumers from Add-On Insurance Products: New Lessons for Insurance Regulation from Behavioral Economics,”Authored with Peter Siegelman

Abstract
Informed observers of insurance markets have long marveled at the high prices charged for a wide variety of low value insurance products sold as “add-ons” to consumers buying other products and services.  This article examines three examples of add-on insurance products – extended warranties for consumer products, loss damage waivers for rental cars, and credit life insurance.  We develop a behavioral economic analysis of these products that helps explain why people buy them and, more importantly, why competition fails to reduce their prices to something approaching their cost. We discuss the implications of this analysis for insurance regulation, exploring four possible strategies:  improved disclosure of the terms of add-on insurance products, a ban on the sale of the products as an add-on, price regulation, and the use of information technology to create a robust market at the point of sale. Drawing from recent U.K. experience, we recommend a mixed approach for the three specific products we examine: a ban on the sale of credit life insurance and extended warranties as add-on insurance products and a new, on-line market for car rental insurance that customers can access at the car rental desk.
Baker, T - 2012 Fall WS.pdf

December 3, 2012

George L. Priest
Edward J. Phelps Professor of Law and Economics, Yale Law School

“Rethinking the Economic Basis of the Standard Oil Refining Monopoly:  Dominance Against Competing Cartels”

Abstract
The success of the Standard Oil monopoly is not well understood. Standard Oil first developed a monopoly over the refining of crude oil, though later extended its control to gathering pipelines, later still to trunk pipelines (from the western Oil Regions to East Coast ports) and, even later, expanded operations to include oil production (drilling) and retail sales at the time the Supreme Court ordered its dissolution over 100 years ago, in 1911.

Though there are several journalistic exposés of Standard Oil—including Henry Demarest Lloyd and Ida Tarbell, as well as business histories—none are fully explanatory. The currently dominant theory of Standard Oil’s success is by Elizabeth Granitz and Benjamin Klein who assert that Standard Oil was chosen by oil shippers, the railroads, to police a railroad cartel. According to Granitz and Klein, the railroads split with Standard Oil the profits from cartelization of the crude and refined oil industry.

This Article challenges that explanation, claiming that there were attempts made to cartelize at all levels of the oil industry—producers, gathering pipelines, refiners, and railroads. There are good economic reasons that explain why Standard Oil, a refiner at the remote western location of Cleveland, acquired most of the pipelines and secured a monopoly against the producers and the railroads.
Priest, G - 2012 Fall WS.pdf