The King of Rockingham County and the Original Bridge to Nowhere

This chapter, reveals the story -- the clash of personalities, the economic tensions, and the political significance -- behind Rockingham County v. Luten Bridge Co. Since its publication in 1929, the opinion has proceeded to leave an impression on generations of law students. Luten Bridge, a staple in most contracts casebooks, is known today as the paradigmatic case that demonstrates the duty to mitigate damages in contract law, whereby a nonbreaching party is not compensated for performance that occurs after the other party announces an intention to breach. This chapter takes on three objectives: it identifies the case\u27s original importance, uncovers the opinion\u27s political and jurisprudential significance, and tells a remarkable story, one that arose within a heated tax revolt pitting the county\u27s farmers against its most celebrated industrialist. Much more than a crisp illustration of the duty to mitigate, Rockingham County v. The Luten Bridge Co. offers a window into a southern community\u27s struggles with a divided social order, the introduction of wealth into local politics, and a changing economy

Ethnic Networks, Extralegal Certainty, and Globalisation: Peering Into the Diamond Industry

For nearly one millenium, the diamond industry\u27s distribution system remained largely unchanged. Ethnic networks, predominated by Jewish merchants, managed the downstream distribution system. Since state courts are unable to reliably enforce executory contracts for diamond sales, these networks succeeded because their community institutions were able to assert extralegal governance. But recent trends in the globalisation of commerce have introduced pressures that might cause the one thousand year-old system to unravel. Low-wage workers from India have displaced higher wage western merchants, consumer demands for political oversight has brought scrutiny to previously secretive networks, and the profitability of global branding campaigns has enabled DeBeers to implement a vertically integrated business strategy that skips the middleman and sells directly to consumers. Since these pressures represent the paradigmatic forces of globalisation, examining changes in the diamond industry offers insights both into the future of ethnic exchange and into globlisation itself

Ethnic Networks, Extralegal Certainty, and Globalisation: Peering Into the Diamond Industry

For nearly one millenium, the diamond industry\u27s distribution system remained largely unchanged. Ethnic networks, predominated by Jewish merchants, managed the downstream distribution system. Since state courts are unable to reliably enforce executory contracts for diamond sales, these networks succeeded because their community institutions were able to assert extralegal governance. But recent trends in the globalisation of commerce have introduced pressures that might cause the one thousand year-old system to unravel. Low-wage workers from India have displaced higher wage western merchants, consumer demands for political oversight has brought scrutiny to previously secretive networks, and the profitability of global branding campaigns has enabled DeBeers to implement a vertically integrated business strategy that skips the middleman and sells directly to consumers. Since these pressures represent the paradigmatic forces of globalisation, examining changes in the diamond industry offers insights both into the future of ethnic exchange and into globlisation itself

Firms, Courts, and Reputation Mechanisms: Towards a Positive Theory of Private Ordering

This Essay formulates a positive model that predicts when commercial parties will employ private ordering to enforce their agreements. The typical enforcement mechanism associated with private ordering is the reputation mechanism, in which a merchant community punishes parties in breach of contract by denying them future business. The growing private ordering literature argues that these private enforcement mechanisms can be superior to the traditional, less efficient enforcement measures provided by public courts. However, previous comparisons between public and private contractual enforcement have presented a misleading dichotomy by failing to consider a third enforcement mechanim: the vertically integrated firm. This Essay develops a model that comprehensively addresses three distinct types of enforcement mechanisms--firms, courts, and reputation-based private ordering. The model rests on a synthesis of transaction cost economics, which compares the efficiencies of firms versus markets, and the private ordering literature, which compares the efficiencies of public courts versus private ordering. It hypothesizes that private ordering will arise when agreements present enforcement difficulties, high-powered market incentives are important, and the costs of entry barriers are low. The Essay then conducts an illustrative test by comparing the model\u27s predictions to documented instances of private ordering

Community Enforcement of Informal Contracts: Jewish Diamond Merchants in New York

The diamond industry is home to many unusual features: the predominance of an ethnically homogeneous community of merchants, the norm of intergenerational family businesses, and a rejection of public courts in favor of private contract enforcement. This paper explains that the diamond industry\u27s unique attributes arise specifically to meet the particularly rigorous hazards of transacting in diamonds. Since diamonds are portable, easily concealable, and extremely valuable, the risk associated with a credit sale can be especially costly. However, the industry enjoys valuable organizational efficiencies if transactions occur on credit between independent, fully incentivized agents. Thus, an efficient system of exchange will find ways to induce merchants who purchase on credit to fulfill their payment obligations. The very features that give the diamond industry an unusual profile are responsible for providing institutions to support credit sales. A system of private arbitration spreads information regarding merchants\u27 past dealings, so a reputation mechanism to monitor merchants can take hold. Intergenerational legacies, though restricting entry only to those who can inherit good reputations from family members, resolve an end-game problem and induce merchants to deal honestly through their very last transaction. And the participation of Ultra-Orthodox Jews, for whom inclusion and participation in their communities is equally paramount to their material wealth, serve important value-added services as diamond cutters and brokers without posing the threat of theft and flight

How Community Institutions Create Economic Advantage: Jewish Diamond Merchants in New York

This paper argues that Jewish merchants have historically dominated the diamond industry because of their ability to reliably implement diamond credit sales. Success in the industry requires enforcing executory agreements that are beyond the reach of public courts, and Jewish diamond merchants enforce such contracts with a reputation mechanism supported by a distinctive set of industry, family, and community institutions. An industry arbitration system publicizes promises that are not kept. Intergenerational legacies induce merchants to deal honestly through their very last transaction, so that their children may inherit valuable livelihoods. And ultra-Orthodox Jews, for whom participation in their communities is paramount, provide important value-added services to the industry without posing the threat of theft and flight

Antitrust and Nonprofit Hospital Mergers: A Return to Basics

Courts reviewing proposed mergers of nonprofit hospitals have too often abandoned the bedrock principles of antitrust law, failing to pay heed to the most elemental hallmarks of socially beneficial competition. This Article suggests that courts’ misapplication of antitrust law in these cases reflects a failure to understand the structural details of the American health care market. After reviewing recent cases in which courts have rejected challenges to proposed mergers between nonprofit hospitals, it documents how courts have engaged in a faulty analysis that ultimately protects nonprofit hospitals from the rigors of standard antitrust scrutiny. It then identifies the core principles of antitrust law—preventing supracompetitive prices, optimizing output, and maximizing allocative efficiency—that have been absent from, if not violated by, the rulings in these merger cases

Concentration in Health Care Markets: Chronic Problems and Better Solutions

Health care providers with market power enjoy substantially more pricing freedom than monopolists in other markets, for a reason not generally recognized: US-style health insurance. Consequently, monopolies in health care cause undesirable redistribution of wealth and inefficient allocation of resources, both of which burden consumers at levels beyond those of other monopolists. The unusual costliness of monopoly power in health care markets demands far more policy attention than it has received. For starters, the health sector needs a more aggressive antitrust policy that effectively prevents the creation of new provider market power through mergers, alliances, or government immunity. An immediate need is ensuring that the formation of accountable care organizations under the Patient Protection and Affordable Care Act (PPACA), which in theory might achieve efficiencies through vertical integrations, do not primarily lead to horizontal integrations that give providers additional market power. Because antitrust policy has been so inadequate for so long in the health sector, and because it remains unlikely that courts or enforcement agencies will undo past mergers that created these powerful provider monopolies, policymakers should pursue additional strategies for contesting existing monopolies. One approach is to apply antitrust rules against “tying” arrangements so that purchasers can combat providers’ profit-enhancing practice of overcharging for large bundles of services instead of trying to exploit separately any monopolies they possess in various submarkets. Another strategy is to use antitrust or regulatory rules to prohibit anticompetitive provisions, such as “antisteering” or “most-favored-nation” clauses, in provider-insurer contracts. Policymakers could also help restore price competition in monopolized markets by enabling private payers to negotiate prices for specific provider services and encouraging insurers to expand the scope of competition — via medical tourism, for example, or configuring innovative health care delivery that bypasses many of the embedded costs in the current system. Some commentators have suggested that the provider monopoly problem is severe enough to warrant consideration of a more radical alternative: regulating provider prices. By restricting how insurers can purchase health services, the PPACA might effectuate a regulatory regime that significantly limits price and nonprice competition. However, even under the PPACA room remains for creative regulatory policies that enhance competition in health care markets and encourage better uses of our increasingly scarce health care dollars

The Antitrust of Reputation Mechanisms: Institutional Economics and Concerted Refusals to Deal

An agreement among competitors to refuse to deal with another party is traditionally per se illegal under the antitrust laws. But coordinated refusals to deal are often necessary to punish wrongdoers, and thus to deter undesirable behavior that state-sponsored courts cannot reach. When viewed as a mechanism to govern transactions and induce socially desirable cooperative behavior, coordinated refusals to deal can sustain valuable reputation mechanisms. This paper employs institutional economics to understand the role of coordinated refusals to deal in merchant circles and to evaluate the economic desirability of permitting such coordinated actions among competitors. It concludes that if the objective of antitrust law is to promote economic efficiency, then per se treatment-or any heightened presumption of illegality-of reputation mechanisms with coordinated punishments is misplaced

Norms and Law: Putting the Horse Before the Cart

Law and society scholars have long been fascinated with the interplay of formal legal and informal extralegal procedures. Unfortunately, the fascination has been accompanied by imprecision, and scholars have conceptually conflated two very different mechanisms that extralegally resolve disputes. One set of mechanisms might be described as the shadow of the law, made famous by seminal works by Professors Stewart Macaulay and Marc Galanter, in which social coercion and custom have force because formal legal rights are credible and reasonably defined. The other set of mechanisms, recently explored by economic historians and legal institutionalists, might be described as order without law, borrowing from Professor Robert Ellickson\u27s famous work.1 In this second mechanism, extralegal mechanisms—whether organized shunning, violence, or social disdain—replace legal coercion to bring social order and are an alternative to, not an extension of, formal legal sanctions. One victim of conflating these mechanisms has been our understanding of industry-wide systems of private law and private adjudication, or private legal systems. Recent examinations of private legal systems have chiefly understood those systems as efforts to economize on litigation and dispute-resolution costs, but private legal systems are better understood as mechanisms that economize on enforcement costs. This is not a small mischaracterization. Instead, it reveals a deep misunderstanding of when and why private enforcement systems arise in a modern economy. This Essay provides a taxonomy for the various mechanisms of private ordering. These assorted mechanisms, despite their important differences, have been conflated in large part because there has been a poor understanding of the particular institutional efficiencies and costs of the alternative systems. Specifically, enforcement costs have often been inadequately distinguished from procedural or disputeresolution costs, and this imprecision has produced theories that inaccurately predict when private ordering will thrive and when the costs of private ordering overwhelm corresponding efficiencies. The implications for institutional theory are significant, as confusion in the literature has led to overappreciation of private ordering, underappreciation of social institutions, and Panglossian attitudes toward both lawlessness and legal development