Predictability and Adaptation in Law and other Markets (chapter in a coming book: Research Handbook on Law and Time)

People and enterprises that are subject to the law find it useful to know what the law is at present, but then also to anticipate future rules. If laws are stable this is easily done. Stability is more common where the judicial branch is concerned, because precedents are often valued, and for good reason. They are more often followed by judges than by those involved in other methods of lawmaking. But in all of lawmaking, and even in the private sphere, there is value to consistency and certainty. And yet, surprises can be attractive if they are not confronted on a regular basis. In extreme cases, expectations can be usefully upended, as is intentionally the case with much retroactive lawmaking. As times change, and new circumstances and information become known, there is often reason for law, and certainly for private decisions and apparent preferences, to change and presumably to improve. This Chapter considers the optimal level of certainty over time. One conclusion is trivial: people would prefer a world in which law changes only when the value of change is greater than the value of certainty. Efficiency and utility are features of an endgame, and these goals are more important than is the process of decision-making, where predictability is often a means to the end, and simply a short-term instruction. At the other end of the spectrum from predictability, or reversals in the case of new information, is the possibility of introducing a random element in law, so that neither the lawmaker, the governed parties, not interest groups eager to get friendly laws enacted, know what to expect. Randomization is rare and would often suggest that lawmakers have no idea what they are doing. At the same time, both certainty and change can be costly in many ways. If predictability is treated as a goal or as a firm rule, new information and circumstances are ignored. And yet, a subtle objection to mistaking the goal of utility with the process of achieving it, or background rule of certainty, is that if people know that a rule will change, there is nearly inevitable discrimination between parties who entered a system of lawmaking at different times. This discrimination is normally objectionable on both moral and public-choice grounds. The tradeoff between predictability and a willingness to change, or simply to surprise people, is complicated, but some examination of this tradeoff in different settings is illuminating. This Chapter begins with the tradeoff between predictability and change over time. It then turns to the connection between change and uneven treatment, and competition among organizations that can serve and exploit this inequality, or simply different preferences

Forum Shopping and Legal Labor Markets: Evidence from the Court Competition Era

Focusing on Chapter 11 bankruptcy reorganizations of publicly listed firms during the court competition era (1991–96), we document local legal employment effects of forum shopping, a stipulation of the law that allows firms to file for bankruptcy far from their headquarters. Bankruptcy shocks increase legal-sector employment in the bankrupt firm’s locale, but forum shopping nullifies this effect. Employment gains of received forum-shopped cases are concentrated in Delaware, with no effect in other receiving forums. Quantification shows that Delaware handled these forum-shopped bankruptcies with just one-fifth of the additional legal workforce that would have been needed if the cases were handled in the firms’ locales. This increase in productivity also coincides with substantial missed potential employment gains in communities where bankruptcies were diverted through forum shopping. The analysis uncovers meaningful effects of forum shopping on local legal labor markets, so far overlooked in the policy debate

“Don’t Go Chasing Waterfalls”: Fiduciary Duties in Venture-Capital-Backed Start-Ups

We develop a model of venture capital contracting and use it to evaluate an emergent set of judicial precedents in corporate law, which we label the Trados doctrine. In our model, founders hold common stock, while venture capital investors hold convertible preferred stock. We show that preferred shareholders have inefficient incentives to liquidate low-valued firms and to continue high-valued firms, while common shareholders inefficiently favor the opposite. The extent of incentive misalignment depends on the firm’s intrinsic and outside valuations, and it is most severe around preferred shareholders’ liquidation preference and conversion point. Although legal liability rules can rectify these misalignments, they can only do so categorically when management prioritizes preferred shareholders’ interests. The Trados doctrine, however, generally obligates management to prioritize common shareholders’ interests. Our model offers a precise mechanism for how capital structure, corporate governance, and legal doctrine jointly determine firms’ value

Political Freedom and Economic Constraints: The Political Setting for the Problem of Twelve

This essay outlines foundations of the current moment facing corporations and politics, which I have characterized as a new “problem of twelve”—that is, the concentration of power in the hands of a small number of index and private equity fund sponsors.1 Through the middle of the twentieth century, public companies dominated the U.S. economy and government. They owed their dominance to having been socially legitimated coming out of the Great Depression, a legitimation built on their affirmative war efforts and on the negative constraints of securities law, progressive taxation, labor unions, and operational regulation. From 1970 on, however, they changed and were dramatically changed by politics and economics. American corporate leaders used politics to liquidate most of their New Deal constraints, simplifying governance of public companies, only to face a new political constraint in the form of the institutional investors, and new economic constraints in the form of globalization, automation and the “technology” of hostile takeovers and private equity. How did corporations shake off their New Deal political constraints? Corporate leaders invested in their own political capital and applied the resulting power to roll back antitrust law, taxation and regulation. Most importantly, they laid low their most powerful political rival—private sector labor unions. As they achieved political victories, however, public companies’ autonomy in fact dramatically shrank. Indeed, they faced an existential crisis – in the form of globalization, inflation, automation, hostile takeovers, and LBOs (i.e., private equity). Since 1990, they have also faced an ongoing challenge in the form of a “shareholder rights movement,” in which institutional investors organized politically, first by public pension funds and hedge funds, and lately increasingly by index funds. Meanwhile, private equity, which seemed to diminish in the recession of 1989–91, has more than recovered and has been growing much faster than public equity markets, displacing public companies in both the economy and the political system. This combination of “liberated” corporate power re-constrained by markets and shareholders sets the stage for the current politics of the “problem of twelve” created by the ongoing growth and concentration of index and private equity funds. If corporations had not been politically “liberated” from 1970 on, the influence of index and private equity funds would be less important to the political system and to the economy. If companies had not faced the whirlwind of global capitalism and the technology shocks it ushered in, choices in how they were governed would not have had such dramatic implications for the economy and polity. If institutional shareholders had not developed the standard suite of powers they use to influence companies—policy formation and coordination, lobbying, shareholder resolutions, and more inthe-weeds but crucial governance tools such as majority vote bylaws—the ability of index funds to influence companies would be significantly weaker. If labor had not been decapitated as a political force, the ability of private equity fund lobbying to eliminate the remaining New Deal constraints on their growth would likely not have been successful. If companies had not become the core not only of the U.S. economy but of its political economy, the stakes for how investment funds are governed would be lower. With this context, it can be better understood why index and private equity funds are increasingly perceived as – and indeed often are – politically active and influential. It also becomes more understandable why other political actors – civil society organizations, social activists, political parties and politicians – have responded and are continuing to respond to these funds’ growing economic clout and political power. Without the backstory, it would be hard to understand how an application of one essence aspect of capitalism—finance—has increasingly attracted political focus on topics such as diversity, treatment of workers, and climate change. Asset managers now draw charges of “socialism” from the right, and charges of antitrust harm and of foot-dragging on other salient issues, such as corporate political disclosure, from the left

Nonprofit Corporations & Politics: The Entity/Coordination Tension

Federal tax law treats separate nonprofit corporations as distinct legal entities for almost all purposes, in common with most other areas of law. With respect to political activity, this means that one nonprofit corporation’s lobbying or election-related actions are generally not attributed to another nonprofit corporation. This is the case even if the two entities have overlapping or even identical boards of directors. It is also the case even if the two entities collaborate regarding their respective activities and share employees, facilities, outside vendors, and other resources, as long as the entities reasonably allocate the costs for those shared resources. In addition, longstanding Supreme Court precedents strongly indicate that the First Amendment requires Congress and the IRS to permit this overlapping, collaboration, and sharing. That lack of attribution is important because different types of nonprofit corporations receive different tax benefits and face different restrictions on their political activity under federal tax law. For example, a charitable nonprofit corporation that is tax-exempt under Internal Revenue Code section 501(c)(3) and eligible to receive tax deductible charitable contributions is limited with respect to lobbying and is prohibited from supporting or opposing candidates for elected public office. In contrast, a social welfare nonprofit corporation that is tax-exempt under Internal Revenue Code section 501(c)(4) but not eligible to receive tax deductible charitable contributions can engage in unlimited lobbying related to its social welfare purpose and can also support or oppose candidates as long as doing so is not its primary activity. And a political organization that is tax-exempt under Internal Revenue Code section 527, although only with respect to contributions received for political purposes, can engage entirely in supporting or opposing candidates. Yet a section 501(c)(3) organization, a section 501(c)(4) organization, and a section 527 organization can have overlapping boards, collaborate about their respective activities, and share resources, as long as they reasonably allocate their expenses and avoid spending directly on political activity that is limited or prohibited given their specific exemption category. There are therefore many groups of nonprofit organizations that consist of affiliated organizations with different federal tax categorizations but a common political purpose. This lack of attribution is in tension with an aspect of federal election law and the election laws of many states. Under these election laws, if an individual or entity coordinates its activities with a candidate committee or political party, that activity is considered a contribution to the benefitted candidate or party. This result means that any spending on that activity is subject to existing source and amount limits on such contributions. In effect, the activity is attributed to the candidate or party because of the coordination even though the candidate or party does not legally control that activity. This is a common sense approach because if it did not exist it would be easy for individuals and other entities to evade contribution limits by engaging in activities not only designed to benefit a candidate or party but done at the specific request of that candidate or party. This reasoning also provides the basis for Supreme Court decisions concluding that this approach is constitutional under the First Amendment. This essay explores the tension created by federal tax law’s respect for separate entity status on one hand and the coordination rules of federal and state election law on the other hand. It also revisits whether, given this tension, the Supreme Court was correct to constitutionalize the former approach when it comes to tax-exempt nonprofits. I conclude that whether this difference is appropriate as a policy matter depends on the policy justification for the political activity limits on section 501(c)(3) charities. If the only such justification is to support the broader federal tax policy prohibiting the deduction of expenditures for political activities, then the lack of attribution is appropriate. If instead the justification is that political activity is inconsistent with status as a section 501(c)(3) charity for broader reasons, then there is a policy argument for attributing the political activity of noncharitable nonprofit corporations to closely affiliated charitable nonprofit corporations and so subjecting that activity to the section 501(c)(3) limits. I also conclude that this latter justification could provide a basis for revisiting the Supreme Court precedents that bar this attribution as a constitutional matter

Weak-Willed Legislatures and Statutory Interpretation

Not all statutes are created equal. Contributing to the literature on “super statutes,” I suggest that an analogy to the philosophical concept of weakness of will can illuminate circumstances under which some statutes ought to stand above others. Analogizing to philosopher Richard Holton’s account of weak will, I develop an account in which some statutes express long-term commitments, are intended to foreclose future deliberation, and enact reasons into the law. Such statutes have the status of what Holton calls “resolutions.” Like an individual resolving to stop eating meat, yet finding themself unable to resist, Congress can be weak willed when it violates such statutes, and this weak-willed action jeopardizes the advantages of enacting such statutes in the first place. I then propose that courts may apply familiar canons of statutory interpretation—the presumption against implied repeal, appropriations canon, and Charming Betsy canon—to hold Congress accountable to its commitments. This account also provides a new normative justification for each of these canons of statutory interpretatio

How Did Corporations Get Stuck in Politics and Can They Escape?

Corporations have always been involved in politics, but today is different. They are taking public positions, either directly or indirectly, on contested political and social issues unrelated to their businesses. In contrast to the conventional wisdom, we argue that this practice, which we term “corporate political posturing,” is problematic. First, it is of dubious value to the corporation and its stakeholders. Corporate political posturing often backfires, it does so unpredictably and potentially catastrophically, and it is particularly susceptible to agency costs. Second, it is harmful to society. The fundamental problem is that corporations are institutionally ill-equipped to take center stage in policy debates. They are inherently self-interested economic actors with goals that often conflict with those of society. This manifests in statements that tend to polarize rather than enlighten and actions that undermine the positions that they back publicly. We surmise that corporations themselves are ambivalent about taking policy positions but are caught in a feedback loop in which customers, employees, and investors demand political involvement. Corporations thus engage in response to competitive pressure, which normalizes the conduct and leads to escalating expectations for further engagement. We see several ways to break this cycle. One possibility, which we consider and reject, is to subject political posturing to distinctive governance rules. A second option is voluntary disarmament. Borrowing from the Business Roundtable Statement on Corporate Purpose, we suggest that corporations could voluntarily and publicly commit to refrain from political posturing. A third option is for corporations to provide greater transparency, either voluntarily or in response to regulatory requirements. If corporations disclosed the extent to which their actions were consistent with their public positions, we predict that fewer corporations would engage in posturing and those that do would back their statements with conduct that matches

Non-Retrogression Without Law

For five straight cycles (the 1970s through the 2010s), Section 5 of the Voting Rights Act dominated redistricting in states covered by the provision. In these states, district plans had to be precleared with federal authorities before they could be implemented. Preclearance was granted only if plans wouldn’t retrogress, that is, reduce minority representation. Thanks to the Supreme Court’s 2013 decision in Shelby County v. Holder, Section 5 is no longer operative. So what happened to minority representation in formerly covered states after Section 5’s protections were withdrawn? This Article is the first to tackle this important question. We examine all states’ district plans before and after the 2020 round of redistricting at the congressional, state senate, and state house levels. Our primary finding is that there was little retrogression in formerly covered states. In sum, the number of minority ability districts in these states actually rose slightly. We also show that formerly covered states were largely indistinguishable from formerly uncovered states in terms of retrogression. If anything, states unaffected by Shelby County retrogressed marginally more than did states impacted by the ruling. Lastly, we begin to probe some of the factors that might explain this surprising pattern. One possible explanation is the status quo bias of many mapmakers, which is reflected in their tendency to keep minority representation constant. Another potential driver is many line-drawers’ reluctance to use retrogression as a partisan weapon. This reluctance is evident in the similar records of all redistricting authorities with respect to retrogression, as well as in the absence of any relationship between retrogression and change in plans’ partisan performance

The Law of Restitution for Mistaken Payments: An Economic Analysis

The law of restitution and unjust enrichment has emerged as an important and independent branch of private law globally but has attracted relatively little economic analysis. This article develops a model of the core example of restitution—mistaken payments—in a parsimonious setting with two pairs of buyers and sellers and low (high) transaction costs within (across) pairs. The framework is based on the idea that mistaken payments to strangers impose a transaction tax on contracting parties. We show that full (partial) restitution is socially optimal when harm is unilateral (bilateral). The model generates several novel insights, shedding new light on the rationale for partial restitution, distortions generated by the change-of-position defense, and the discharge-for-value doctrine (implicated in the recent widely discussed case involving a large mistaken payment by Citibank). Taking account of moral obligations complicates the economic analysis but does not undermine the main results

Navigating State Interventions: The Pivotal Role of PTAs in Modern Trade Conflicts

In international trade, State interventions often challenge the efficacy of traditional antidumping and countervailing measures under the World Trade Organization (WTO) framework. This article examines the limitations of the Anti-Dumping Agreement and the Agreement on Subsidies and Countervailing Measures (SCM Agreement) in addressing State interventions, such as export taxes, export bans on raw materials, and non-commercial activities by State-owned enterprises. These interventions pose significant legal and economic challenges in global trade. The article advocates for the potential of preferential trade agreements (PTAs) as practical tools to address these challenges, surpassing traditional legal pathways under the Anti-Dumping Agreement. An analysis of recent WTO disputes demonstrates how PTAs provide targeted disciplines against State interventions that cause market distortions and unfair trade practices. PTAs offer a more rational and equitable approach to managing trade conflicts, avoiding conventional trade remedies’ economic irrationalities and protectionist tendencies. The article proposes a strategic shift towards PTAs to fill gaps left by traditional WTO agreements. It highlights the need for a dynamic, adaptable legal framework in international trade that responds to sophisticated State interventions in the global economy