New Rules

Kevin Lewis

January 01, 2014

License to Cheat: Voluntary Regulation and Ethical Behavior

Francesca Gino, Erin Krupka & Roberto Weber
Management Science, October 2013, Pages 2187-2203

Although monitoring and regulation can be used to combat socially costly unethical conduct, their intended targets can often avoid regulation or hide their behavior. This surrenders at least part of the effectiveness of regulatory policies to firms' and individuals' decisions to voluntarily submit to regulation. We study individuals' decisions to avoid monitoring or regulation and thus enhance their ability to engage in unethical conduct. We conduct a laboratory experiment in which participants engage in a competitive task and can decide between having the opportunity to misreport their performance or having their performance verified by an external monitor. To study the effect of social factors on the willingness to be subject to monitoring, we vary whether participants make this decision simultaneously with others or sequentially, as well as whether the decision is private or public. Our results show that the opportunity to avoid being submitted to regulation produces more unethical conduct than situations in which regulation is either exogenously imposed or entirely absent.


Leviathan and Interpretive Revolution: The Administrative State, the Judiciary, and the Rise of Legislative History, 1890-1950

Nicholas Parrillo
Yale Law Journal, November 2013, Pages 266-411

A generation ago, it was common and uncontroversial for federal judges to rely upon legislative history when interpreting a statute. But since the 1980s, the textualist movement, led by Justice Scalia, has urged the banishment of legislative history from the judicial system. The resulting debate between textualists and their opponents - a debate that has dominated statutory interpretation for a generation - cannot be truly understood unless we know how legislative history came to be such a common tool of interpretation to begin with. This question is not answered by the scholarly literature, which focuses on how reliance on legislative history became permissible as a matter of doctrine (in the Holy Trinity Church case in 1892), not on how it became normal, routine, and expected as a matter of judicial and lawyerly practice. The question of normalization is key, for legislative history has long been considered more difficult and costly to research than other interpretive sources. What kind of judge or lawyer would routinize the use of a source often considered intractable? Drawing upon new citation data and archival research, this Article reveals that judicial use of legislative history became routine quite suddenly, in about 1940. The key player in pushing legislative history on the judiciary was the newly expanded New Deal administrative state. By reason of its unprecedented manpower and its intimacy with Congress (which often meant congressmen depended on agency personnel to help draft bills and write legislative history), the administrative state was the first institution in American history capable of systematically researching and briefing legislative discourse and rendering it tractable and legible to judges on a wholesale basis. By embracing legislative history circa 1940, judges were taking up a source of which the bureaucracy was a privileged producer and user - a development integral to judges' larger acceptance of agency-centered governance. Legislative history was, at least in its origin, a statist tool of interpretation.


US shadow economies: A state-level study

Travis Wiseman
Constitutional Political Economy, December 2013, Pages 310-335

Recent studies of shadow economies focus primarily on cross-country comparisons. Few have examined regional or state-level variations in underground economic activity. This paper presents estimates of the shadow economy for 50 US states over the period 1997-2008. Results suggest that tax and social welfare burdens, labor market regulations, and intensity of regulation enforcement are important determinants of the underground economy. Among the states, Delaware, on average, maintains the smallest shadow economy at 7.28 % of GDP; Oregon, on average, has the second smallest shadow economy at 7.41 % of GDP; followed by Colorado, averaging 7.52 % of GDP, rounding out the three smallest shadow economies in the US West Virginia and Mississippi, on average, have the largest shadow economies in the US as a percent of GDP (9.32 and 9.54 %, respectively).


The determinants of federal and state enforcement of workplace safety regulations: OSHA inspections 1990-2010

Juergen Jung & Michael Makowsky
Journal of Regulatory Economics, February 2014, Pages 1-33

We explore the determinants of inspection outcomes across 1.6 million Occupational Safety and Health Agency (OSHA) audits from 1990 through 2010. We find that discretion in enforcement differs in state and federally conducted inspections. State agencies are more sensitive to local economic conditions, finding fewer standard violations and fewer serious violations as unemployment increases. Larger companies receive greater lenience in multiple dimensions. Inspector issued fines and final fines, after negotiated reductions, are both smaller during Republican presidencies. Quantile regression analysis reveals that Presidential and Congressional party affiliations have their greatest impact on the largest negotiated reductions in fines.


Creating 'Reasonable Accommodations' for Disabled Individuals. The Golf Cart Test.

Griffin Sims Edwards
University of Alabama Working Paper, October 2013

Identification of, and policies to discourage, discrimination have long been prevalent in academic research. While the evidence surrounding the consequences, efficacy, and desirability of affirmative action policies remains mixed, one area that remains unexplained is the workplace advantages gained to the discriminated group when affirmative action policies are implemented. Using the ADA's requirement that businesses make reasonable accommodations for disabled individuals, I estimate the workplace advantage disabled individuals may have in a golf tournament. Exploiting the exogenous assignment of golf carts in intercollegiate golf tournaments, I find that golf carts actually provide no performance advantage and actually inhibit performance.


Very Long-Run Discount Rates

Stefano Giglio, Matteo Maggiori & Johannes Stroebel
NYU Working Paper, October 2013

We provide the first direct estimates of how agents trade off immediate costs and uncertain future benefits that occur in the very long run, 100 or more years away. We find that very long-run discount rates are low, much lower than those routinely assumed by economic theory. We estimate these discount rates by exploiting a unique feature of residential housing markets in England, Wales and Singapore, where residential property ownership takes the form of either leaseholds or freeholds. Leaseholds are temporary, tradable ownership contracts with maturities between 50 and 999 years, while freeholds are perpetual ownership contracts. The difference between leasehold and freehold prices represents the present value of perpetual rental income starting at leasehold expiry. We estimate these discounts for varying leasehold maturities via hedonic regressions using proprietary datasets of the universe of transactions in each country. Agents discount very long-run cash flows at low rates, assigning high values to cash flows hundreds of years in the future. For example, 100-year leaseholds are valued up to 15% less than otherwise identical freeholds. This suggests that both long-term risk-free discount rates and long-term risk premia are low. Our results provide a new testing ground for asset-pricing theories, and have direct implications for climate-change policy and long-run fiscal policy.


The impact of consumer advocates on regulatory policy in the electric utility sector

Adam Fremeth, Guy Holburn & Pablo Spiller
Public Choice, forthcoming

We examine the effect of consumer advocate participation in administrative procedures on regulatory policy. We use a unique panel database of rate reviews conducted for US electric utilities from 1980 to 2007 to assess how state consumer advocates affect Public Utility Commission decisions on utilities' allowed financial returns and rate structures. We find first that utilities experience fewer rate reviews in states with consumer advocates, consistent with utilities strategically postponing requests for rate increases. Second, after controlling for observed and unobserved state characteristics, we find that PUCs in states with consumer advocates permit returns on equity that are on average 0.45 percentage points lower than states without advocates - equivalent to a $7.9 million (3.7 %) reduction in average utility operating income, all else equal. Third, consumer advocates are associated with lower residential rates relative to other customer classes. Our findings provide statistical support for the thesis that institutionalizing interest group representation in administrative procedures is one way for legislatures indirectly to influence agency-determined policies.


Regulation and financial disclosure: The impact of plain English

Tim Loughran & Bill McDonald
Journal of Regulatory Economics, February 2014, Pages 94-113

In October 1998, the SEC implemented a rule requiring firms to use plain English in their prospectus filings. In addition to the rule, the SEC encouraged the use of plain English in all filings and communication with shareholders. Did the SEC rule significantly impact managers' disclosure style? And, more interestingly, did the SEC's recommendations lead managers to change their disclosure style in filings not under the plain English mandate? Our textual analysis of Form 424, IPO prospectus, and 10-K filings over 1994-2009 finds that the SEC's implementation of the plain English rule substantively impacted managerial behavior. When we focus on 10-K filings, we find that after the 1998 rule, firms are more likely to improve the stylistic components of their filing before an equity issuance and firms with better corporate governance policies are more likely to comply with the rule.

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