Rules
Molly Niesen
Advertising & Society Review, Winter 2012
"In 1914, President Woodrow Wilson signed the Federal Trade Commission Act into law, establishing the U.S. Federal Trade Commission (FTC) as a permanent government agency responsible for regulating anti-competitive business practices. Amendments to the FTC Act during the 1930s strengthened the FTC's role in consumer protection by providing the agency with additional jurisdiction over deceptive and unfair advertising. With the exception of a few industries specifically regulated by other federal agencies, the FTC has broad authority to regulate the entire American economy. Despite these extensive powers, the FTC has been frequently regarded as an ineffective and inept agency throughout most of its existence. But in 1970, after its long period of hibernation, the FTC began to awaken. From the perspective of major businesses, the FTC during the early 1970s was by far the most formidable regulatory agency in Washington...This paper relies on hundreds of industry trade publications and a variety of other historical documents to explore the following developments: the FTC's regulatory renaissance from 1970-3; the initial response by advertisers and related industries; and the ways in which business interests came together to marshal resources and talent to defeat the FTC's aggressive policy agenda by 1980...[The FTC's agenda] changed in 1969 when consumer activist Ralph Nader and his 'Nader's Raiders' launched a scathing critique of the FTC, mocking the agency as the 'little old lady of Pennsylvania Avenue' because of its tendency to be asleep at the wheel when it came to consumer protections. The Nader Report fell on many sympathetic ears in Washington, and Congress immediately initiated hearings on the FTC. Congress encouraged President Nixon to ask the American Bar Association (ABA) to study the FTC, and Nixon complied with the ABA's recommendations to revive the agency...Nixon appointed Caspar Weinberger, a California lawyer and former aid to Governor Ronald Reagan. In a personal conversation at the White House, Nixon told Weinberger to 'go in there and clean it up, and you won't have any trouble from me.' Weinberger was well known for enthusiastically supporting Reagan's fiscal policies, and because of his pro-industry background many in the business community doubted that Weinberger would embody the characteristics of an effective leader as outlined by the ABA report. The confidence on behalf of businesses was shaken when Weinberger immediately began to 'clean up the agency' through zealous reorganization and re-staffing. A headline from an Advertising Age article in 1970 proclaimed, 'Marketers Who Staved Off Old FTC Now Find ‘Little Old Lady' Has Teeth.' The Wall Street Journal colorfully observed, 'The little old lady was languishing with a bad case of tired blood. But a recent transfusion has the old gal kicking up her heels like a liberated woman.' In addition to a complete re-staffing, Weinberger reorganized the FTC by creating two new divisions: the Bureau of Competition (to look into the ways in which industrial concentration affects pricing, competition, and advertising) and the Bureau of Consumer Protection (to study deceptive advertising)...After a mere five months of chairmanship, Nixon reappointed Weinberger as the deputy director of the new Office of Management and Budget...To the surprise of these skeptics and to the disappointment of many in the business community, Nixon replaced Weinberger with Miles W. Kirkpatrick, the same lawyer who had headed the ABA's study of the FTC two years prior."
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The Effect of Regulatory Uncertainty on Investment: Evidence from Renewable Energy Generation
Kira Fabrizio
Journal of Law, Economics, and Organization, forthcoming
Abstract:
How are firms' investment decisions influenced by potential instability in the regulatory environment? Firms that anticipate regulatory change may alter their responses to current policies, potentially rendering those policies less effective. This article explores the pattern of investments in renewable generation assets in the US electricity industry following the implementation of Renewable Portfolio Standard (RPS) policies. Viewing these investments through the lens of transaction cost economics, the article investigates whether the likelihood of future regulatory change in a state dampened (or spurred) firm responses to RPS policies in that state. I find that firms invested less in new assets in states that had previously passed and repealed legislation to restructure the electricity industry, indicating that perceived regulatory instability reduces new investment and undermines policy goals.
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The Health Impact of Mandatory Bicycle Helmet Laws
Piet de Jong
Risk Analysis, forthcoming
Abstract:
This article seeks to answer the question whether mandatory bicycle helmet laws deliver a net societal health benefit. The question is addressed using a simple model. The model recognizes a single health benefit - reduced head injuries - and a single health cost - increased morbidity due to foregone exercise from reduced cycling. Using estimates suggested in the literature on the effectiveness of helmets, the health benefits of cycling, head injury rates, and reductions in cycling leads to the following conclusions. In jurisdictions where cycling is safe, a helmet law is likely to have a large unintended negative health impact. In jurisdictions where cycling is relatively unsafe, helmets will do little to make it safer and a helmet law, under relatively extreme assumptions, may make a small positive contribution to net societal health. The model serves to focus the mandatory bicycle helmet law debate on overall health.
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Optimization, path dependence and the law: Can judges promote efficiency?
Alain Marciano & Elias Khalil
International Review of Law and Economics, March 2012, Pages 72-82
Abstract:
The thesis that judges could (voluntarily or not) promote efficiency through their decisions has largely been discussed since Posner put it forward in the early 1970s. There nonetheless remains a methodological aspect that has never (to our knowledge) been analyzed in relation to the judges-and-efficiency thesis. We thus show that both promoters and critics of the judges-and-efficiency thesis similarly use a definition of optimization in which history, constraints and path-dependency are viewed as obstacles that must be removed to reach the most efficient outcome. This is misleading. Efficiency cannot be defined in absolute terms, as a "global ideal" that would mean being free from any constraint, including historically deposited ones. That judges are obliged to refer to the past does not mean that they are unable to make the most efficient decision because constraints are part of the optimization process; or optimization is necessarily path-dependent. Thus, the output of legal systems cannot be efficient or inefficient per se. This is what we argue in this paper.
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Securing Private Property: Formal versus Informal Institutions
Claudia Williamson & Carrie Kerekes
Journal of Law and Economics, August 2011, Pages 537-572
Abstract:
Property rights are one of the most fundamental and highly robust institutions supporting economic performance. However, the channels through which property rights are achieved are not adequately identified. This paper is a first step toward unbundling the black box of property rights into a formal and an informal component. We empirically determine the significance of both informal and formal rules in securing property rights. We find that when both components are included in the analysis, the impact of formal constraints is greatly diminished, while informal constraints are highly significant in explaining the security of property. These results are robust to a variety of model specifications, multiple instrumental variables, and a range of control variables.
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Employment and Distribution Effects of the Minimum Wage
Fabian Slonimczyk & Peter Skott
Journal of Economic Behavior & Organization, forthcoming
Abstract:
This paper analyzes the effects of the minimum wage on wage inequality, relative employment and over-education. We show that over-education can be generated endogenously and that an increase in the minimum wage can raise both total and low-skill employment, and produce a fall in inequality. Evidence from the US suggests that these theoretical results are empirically relevant. The over-education rate has been increasing and our regression analysis suggests that the decrease in the minimum wage may have led to a deterioration of the employment and relative wage of low-skill workers.
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David Schleifer
Bulletin of Science, Technology & Society, December 2011, Pages 460-471
Abstract:
Many scholars assume that industry meddles in scientific research in order to defend their products. But this article shows that industry meddling in science can have a variety of consequences. American food manufacturers long denied that trans fats were associated with disease. Academic scientists, government scientists, and activists in fact endorsed trans fats as a healthier alternative to saturated fats. But in 1990, a high-profile study showed that trans fats increased risk factors for heart disease more than saturated fats did. Industry funded a U.S. Department of Agriculture study that they hoped would exonerate trans fats. But the industry-funded U.S. Department of Agriculture study also indicated that trans fats increased risk factors for heart disease more than saturated fats. Industry quickly began developing trans fat alternatives. This confirms that corporations get involved in science in order to defend their products. But involvement in science can be the very means by which corporations persuade themselves to change their products.
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Are bigger governments better providers of public goods? Evidence from air pollution
Thomas Bernauer & Vally Koubi
Public Choice, forthcoming
Abstract:
Theories explaining government size and its consequences are of two varieties. The first portrays government as a provider of public goods and a corrector of externalities. The second associates larger governments with bureaucratic inefficiency and special-interest-group influence. What distinguishes these alternatives is that only in the former is governmental expansion generally associated with an increase in social welfare. In the latter, the link between government size and public goods provision (or social welfare) is negative. We study the empirical significance of these competing claims by examining the relationship between government size and a particular public good, namely environmental quality (notably, air quality measured by SO2 concentrations), for 42 countries over the period 1971-1996. We find that the relationship is negative, even after accounting for the quality of government (quality of bureaucracy and the level of corruption). This result may not prove conclusively that the growth of government has been driven by factors other than concern for the public good, but it creates a presumption against the theory of government size that emphasizes public good provision.
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Securitizing Environmental Risk and the Keystone XL Pipeline
Kerry Smith
The Economists' Voice, March 2012
Abstract:
When faced with irreversible decisions with significant uncertainty about the environmental costs of accidents, such as the Keystone XL Pipeline or hydro-fracking for natural gas, policymakers should use an environmental bond to securitize self insurance.
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New-vehicle characteristics and the cost of the Corporate Average Fuel Economy standard
Thomas Klier & Joshua Linn
RAND Journal of Economics, Spring 2012, Pages 186-213
Abstract:
By 2016, the Corporate Average Fuel Economy (CAFE) standard will increase by 40%. This article focuses on the medium-run effects of fuel economy regulation. We estimate consumers' willingness to pay for vehicle characteristics. We employ a novel empirical strategy that accounts for the characteristics' endogeneity by using variation of engine models used in vehicle models. The results imply that consumers value an increase in power more than an increase in fuel economy. Simulations of the effects of an increase in the CAFE standard suggest that regulatory costs are significantly smaller in the medium run than in the short run.
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Clunkers or Junkers? Adverse Selection in a Vehicle Retirement Program
Ryan Sandler
American Economics Journal: Economic Policy, forthcoming
Abstract:
Vehicle retirement programs have become popular tools of public policy for reducing pollution. The efficacy of these programs is difficult to measure, as it is difficult to tell how much a vehicle would have polluted otherwise. I estimate that counterfactual using data from a long-running local program in California. I utilize the universe of emissions inspections from California's Smog Check program to construct vehicle usage histories of retired cars and similar vehicles which did not retire early. I find that the program's cost-effectiveness steadily declined over time because of the depreciation of the vehicle fleet, and because of adverse selection.
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The Anti-New Deal Progressive: Roscoe Pound's Alternative Administrative State
Joseph Postell
Review of Politics, Winter 2012, Pages 53-85
Abstract:
Recent scholarship has linked the rise of the Progressive movement in America to the creation of an "administrative state" - a form of government where legislative, executive, and judicial powers are delegated into the hands of administrative agencies which compose a "headless fourth branch of government." This form of government was largely constructed during the New Deal period. The influential legal theorist Roscoe Pound provides the paradoxical example of a Progressive who balked at the New Deal. While many commentators have concluded that Pound's opposition to the New Deal was based on a departure from his earlier Progressive thought, his opposition was in fact based on a consistent Progressive philosophy. Pound therefore provided a vision of an alternative administrative state, which would achieve the ends of the Progressive vision but without the means of the administrative state.
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Every shroud has a silver lining: The visible benefits of hidden surcharges
David de Meza & Diane Reyniers
Economics Letters, August 2012, Pages 151-153
Abstract:
Opportunities for shrouded pricing drive down upfront price as firms compete to capture new customers. Unless the surcharge is sufficiently high, consumers are worse off if the practice is banned, assuming Cournot-Nash equilibrium and isoelastic demand.
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Competition and Illicit Quality
Victor Manuel Bennett et al.
Harvard Working Paper, February 2012
Abstract:
Competition among firms can have many positive outcomes, including decreased prices and improved quality. Yet competition can have a darker side when firms can gain competitive advantage through illicit and corrupt activities. In this paper, we argue that competition can lead organizations to provide illicit quality that satisfies customer demand but violates laws and regulations and that this outcome is particularly likely when price competition is restricted. Using 28 million vehicle emissions tests from more than 11,000 facilities, we show that increased competition is associated with greater inspection leniency, a form of illicit quality that customers value but is illegal and socially costly. Firms with greater numbers of local competitors pass customers at considerably higher rates and are more likely to lose customers they fail to pass, suggesting that the alternatives that competition provides to customers intensify pressure to illegally provide leniency. We also show that, at least in contexts when pricing is restricted, firms use illicit quality as an entry strategy.
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Cellular Service Demand: Biased Beliefs, Learning, and Bill Shock
Michael Grubb & Matthew Osborne
MIT Working Paper, February 2012
Abstract:
By April 2013, the FCC's recent bill-shock agreement with cellular carriers requires consumers be notified when exceeding usage allowances. Will the agreement help or hurt consumers? To answer this question, we estimate a model of consumer plan choice, usage, and learning using a panel of cellular bills. Our model predicts that the agreement will lower average consumer welfare by $2 per year because firms will respond by raising monthly fees. Our approach is based on novel evidence that consumers are inattentive to past usage (meaning that bill-shock alerts are informative) and advances structural modeling of demand in situations where multipart tariffs induce marginal-price uncertainty. Additionally, our model estimates show that an average consumer underestimates both the mean and variance of future calling. These biases cost consumers $42 per year at existing prices. Moreover, absent bias, the bill-shock agreement would have little to no effect.
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Accidental death and the rule of joint and several liability
Daniel Carvell, Janet Currie & Bentley MacLeod
RAND Journal of Economics, Spring 2012, Pages 51-77
Abstract:
Most U.S. states have enacted JSL reform, the move from a regime of joint and several liability (JSL) that allows plaintiffs to claim full recovery from any one of multiple defendants to one where defendants are held liable only for the harm they cause. Contrary to previous theoretical work, we show that JSL reform can increase precaution by judgment proof agent by giving "deep pockets" an incentive to reduce their own liability by bringing judgment-proof agents into court. This result can help explain our empirical findings showing that JSL reform reduces death rates (and hence increase precaution) for many types of accidents. Together, these results highlight the role that litigation costs and judgment-proof agents play in the functioning of the American tort system.
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The Impact of Federal Preemption of State Antipredatory Lending Laws on the Foreclosure Crisis
Lei Ding et al.
Journal of Policy Analysis and Management, Spring 2012, Pages 367-387
Abstract:
State antipredatory lending laws (APLs) are designed to protect borrowers against predatory lending that can increase the risk of default and deplete the home equity held by borrowers. Federal regulators instituted preemption that limited the scope and reach of state antipredatory lending regulations for certain lenders. Based on the variation in state laws and the variation in the regulatory environment among lenders, this paper identifies the effects of federal preemption of state APLs on the quality of mortgages originated by preempted lenders. The results provide evidence of a relatively higher increase in default risk among loans exempted from strong state antipredatory laws. These results are most robust among refinance mortgages with adjustable interest rates - a large and highly dynamic market in the period of analysis. The findings provide initial evidence that preemption of state mortgage lending regulations may result in an increase in mortgage default risk, thus limiting consumer protection in the residential mortgage market.
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Paroma Sanyal & Suman Ghosh
Review of Economics and Statistics, forthcoming
Abstract:
This paper studies the innovation response of upstream technology suppliers when their downstream technology buyers transition from regulation to product market competition. By modeling the impact of US electricity deregulation in the 1990‟s on patenting, we find that after deregulation: (a) the net competition effect (comprised of the pure competition and the escape competition effect) decreased innovation by 18.3 percent after deregulation, and (b) the appropriation effect which has increased innovation by 19.6 percent after deregulation. Other factors associated of deregulation have led to a 20.6 percent decline in innovation. In aggregate we find that electric technology innovation by electric equipment manufacturers (who were the upstream innovators) has experienced a 19.3 percent decline due to deregulation. In addition, upstream innovation quality and generality have both declined after the introduction of downstream competition.
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Experts Judging Experts: The Role of Expertise in Reviewing Agency Decision Making
Banks Miller & Brett Curry
Law & Social Inquiry, forthcoming
Abstract:
What role does judicial subject matter expertise play in the review of agency decisions? Using a data set of decisions in which the Board of Patent Appeals and Interferences (BPAI) is reviewed by the Court of Appeals for the Federal Circuit, we investigate this question and find that greater subject matter expertise does make it more likely that a judge will vote to reverse an agency decision.
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Tao Dumas & Stacia Haynie
State Politics & Policy Quarterly, forthcoming
Abstract:
This study creates and empirically tests an integrated model of trial court decision making to explore the hypothesis that jury verdicts reflect the social, political, and economic attributes of the community in which the court resides. In addition, the analyses examine the influence of attorneys, litigants, case facts, and judges on trial outcomes. Using an original data set comprising all reported civil trial verdicts decided in the state of Alabama from 2002 to 2008, we uncover strong evidence that community composition influences both the dispute resolution and resource allocation functions of trial courts. This research improves our knowledge of trial court decision making and contributes to our theoretical understanding of the effect of extralegal factors on the performance of political institutions.
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How the market responds to dynamically inconsistent preferences
Ben McQuillin & Robert Sugden
Social Choice and Welfare, April 2012, Pages 617-634
Abstract:
This paper responds to the ‘soft paternalist' argument that the findings of behavioural economics make traditional objections to paternalism incoherent. We show that there is a normatively significant sense in which, even if individuals lack coherent preferences, competitive markets are efficient in providing them with opportunities to get what they want. Extending earlier analysis by Sugden, we model a multi-period ‘storage economy' and explore the implications of dynamically inconsistent preferences. We show that, despite apparent conflicts of judgement between an individual's ‘selves', competitive markets provide maximal opportunity, and that they do so by facilitating voluntary exchanges between selves.
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Judicial versus ‘natural' selection of legal rules with an application to accident law
Thomas Miceli
Journal of Institutional Economics, June 2012, Pages 143-159
Abstract:
Law and economics scholars argue that the common law evolves toward efficiency. Invisible-hand theories suggest that the law is primarily driven by a selection process whereby inefficient laws are litigated more frequently than efficient laws, and hence are more likely to be overturned. However, the preferences of judges also necessarily affect legal change. This paper models the interaction of these two forces to evaluate the efficiency claim, and then applies the conclusions to the evolution of accident law in the United States beginning in the 19th century. Specifically, it attributes the persistence of negligence to its efficiency properties, despite its having been initially selected by judges for a different reason. The paper relates legal evolution to biological evolution by employing the concepts of natural and artificial selection, and the more recent concept of exaptation.
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Deterrence, expected cost, uncertainty and voting: Experimental evidence
Gregory DeAngelo & Gary Charness
Journal of Risk and Uncertainty, February 2012, Pages 73-100
Abstract:
We conduct laboratory experiments to investigate the effects of deterrence mechanisms under controlled conditions. The effect of the expected cost of punishment of an individual's decision to engage in a proscribed activity and the effect of uncertainty on an individual's decision to commit a violation are very difficult to isolate in field data. We use a roadway speeding framing and find that (a) individuals respond considerably to increases in the expected cost of speeding, (b) uncertainty about the enforcement regime yields a significant reduction in violations committed, and (c) people are much more likely to speed when the punishment regime for which they voted is implemented. Our results have important implications for a behavioral theory of deterrence under uncertainty.
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The triumph of regulatory politics: Benefit-cost analysis and political salience
Stuart Shapiro & John Morrall
Regulation & Governance, forthcoming
Abstract:
While benefit-cost analysis (BCA) is now a permanent part of the regulatory process in the United States, and many other countries around the world as well as the European Union have adopted it or are moving toward it, there have been few empirical attempts to assess either whether its use improves regulations or how BCA interacts with the political environment. We use a unique US database of the costs and benefits of 109 economically significant regulations issued between 2000 and 2009 to examine whether the amount of information provided in the BCA or political factors surrounding the regulation better correlate with the net benefits of the regulation. We find that there is little correlation between the information provided by the analysis and the net benefits. However, we find that regulations that receive few public comments and are not issued at the end of an administration, have the highest net benefits. These are the regulations that are the least politically salient. This interaction between the political environment and the economic performance of a regulation has been under-examined and deserves further study.
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Coming Clean and Cleaning Up: Does Voluntary Self-Reporting Indicate Effective Self-Policing?
Michael Toffel & Jodi Short
Journal of Law and Economics, August 2011, Pages 609-649
Abstract:
Regulatory agencies are increasingly establishing voluntary self-reporting programs both as an investigative tool and to encourage regulated firms to commit to policing themselves. We investigate whether voluntary self-reporting can reliably indicate effective self-policing efforts that might provide opportunities for enforcement efficiencies. We find that regulators used self-reports of legal violations as a heuristic for identifying firms that are effectively policing their own operations, shifting enforcement resources away from those that voluntarily disclose. We also find that these firms that voluntarily disclosed regulatory violations and committed to self-policing improved their regulatory compliance and environmental performance, which suggests that the enforcement relief they received was warranted. Collectively, our results suggest that self-reporting can be a useful tool for reliably identifying and leveraging the voluntary self-policing efforts of regulated companies.
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Joshua Ozymy & Melissa Jarrell
Environmental Politics, May/June 2012, Pages 451-466
Abstract:
Upset events, emissions released to air due to accidental or unavoidable circumstances at industrial facilities, are often exempt from fines and enforcement actions by state regulators, even if state rules conflict with the Clean Air Act. State rules may allow upset events to become a substantial, yet little-studied source of emissions at large industrial complexes. Drawing from Jacob Hacker's theory of policy drift, upset events are framed theoretically as a problem of regulatory drift between state and federal environmental regulations. Supporting analysis is provided by a case study cataloguing the emissions generated during upset events at six petroleum refineries, 2003-2008. Findings demonstrate that upset events occurred routinely and released approximately 8.5 million pounds of air emissions. Future research should examine upset events at a variety of facilities in Texas. Regulators should enhance data accessibility to facilitate analysis in other states.
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Hide and Seek: Costly Consumer Privacy in a Market with Repeat Purchases
Vincent Conitzer, Curtis Taylor & Liad Wagman
Marketing Science, March/April 2012, Pages 277-292
Abstract:
When a firm can recognize its previous customers, it may use information about their past purchases to price discriminate. We study a model with a monopolist and a continuum of heterogeneous consumers, where consumers have the ability to maintain their anonymity and avoid being identified as past customers, possibly at a cost. When consumers can freely maintain their anonymity, they all individually choose to do so, which results in the highest profit for the monopolist. Increasing the cost of anonymity can benefit consumers but only up to a point, after which the effect is reversed. We show that if the monopolist or an independent third party controls the cost of anonymity, it often works to the detriment of consumers.