Limited Liability and the Known Unknown

Limited liability is a double-edged sword. On the one hand, limited lia-bility may help overcome investors’ risk aversion and facilitate capital formation and economic growth. On the other hand, limited liability is widely believed to contribute to excessive risk-taking and externaliza-tion of losses to the public. The externalization problem can be mitigated imperfectly through existing mechanisms such as regulation, mandatory insurance, and minimum capital requirements. These mechanisms would be more effective if information asymmetries between industry and poli-cymakers were reduced. Private businesses typically have better infor-mation about industry-specific risks than policymakers. A charge for limited liability entities—resembling a corporate income tax but calibrated to risk levels—could have two salutary effects. First, a well-calibrated limited liability tax could help compensate the public fisc for risks and reduce externalization. Second, a limited liability tax could force private industry actors to reveal information to policymakers and regulators, thereby dynamically improving the public response to externalization risk. Charging firms for limited liability at initially similar rates will lead relatively low-risk firms to forgo limited liability, while relatively high-risk firms will pay for limited liability. Policymakers will then be able to focus on the industries whose firms have self-identified as high risk, and thus develop more finely tailored regulatory responses. Because the ben-efits of making the proper election are fully internalized by individual firms, whereas the costs of future regulation or limited liability tax changes will be borne collectively by industries, firms will be unlikely to strategically mislead policymakers in electing limited or unlimited lia-bility. By helping to reveal private information and focus regulators’ at-tention, a limited liability tax could accelerate the pace at which poli-cymakers learn, and therefore, the pace at which regulations improve

Competition and Crisis in Mortgage Securitization

U.S. policy makers often treat market competition as a panacea. However, in the case of mortgage securitization, policy makers’ faith in competition is misplaced. Competitive mortgage securitization has been tried three times in U.S. history— during the 1880s, the 1920s, and the 2000s—and every time it has collapsed. Most recently, competition between mortgage securitizers led to a race to the bottom on mortgage underwriting standards that ended in the late 2000s financial crisis. This Article provides original evidence that when competition was less intense and securitizers had more buyer power, securitizers acted to monitor mortgage originators and to maintain prudent underwriting. However, securitizers’ ability to monitor originators and maintain high standards was undermined as competition shifted power away from securitizers and toward originators. Although standards declined across the market, the largest and most powerful of the mortgage securitizers, the Government Sponsored Enterprises (GSEs), remained more successful than other mortgage securitizers at maintaining prudent underwriting. This Article proposes reforms based on lessons from the recent financial crisis: merge the GSEs with various government agencies’ mortgage operations to create a single dedicated mortgage securitization agency that would seek to maintain market stability, improve underwriting, and provide a long-term investment return for the benefit of taxpayers

Work Hours & Income Tax Cuts: Evidence from Federal-State Tax Interactions

We investigate how income tax reductions affect work hours. Our empirical strategy relies on the fact that, in states where taxpayers can deduct federal tax payments from state taxable income, federal tax changes are dampened. We study 2003 tax reforms (JGTRRA) that dra¬matically reduced federal tax rates on dividends and capital gains, and moderately reduced rates on ordinary income. Difference-in-Difference analysis indicates that work hours decreased most among high income and wealthy taxpayers who were most directly affected by the tax reductions. The decrease in hours was larger for residents of states in which the effective tax reductions were larger. Conversely, we find possible evidence that larger ordinary income tax rate reductions in the 1980s, accompanied by effective tax increases on capital gains, had the opposite effect and induced an increase in work hours. These results suggest that the effect of tax reductions may depend on the type of income targeted

Taxing Contractual Complexity

Consumers rarely understand contracts offered by sellers. It does not make sense for consumers to invest in understanding these contracts because they are typically complex, time and attention are limited, and the value at stake is often low. Because consumers don’t understand contracts and information sharing among consumers is costly, sellers can profit by drafting contracts that harm consumers more than they benefit sellers. Sellers who would like to offer efficient contracts face competitive pressures not to do so because consumers who do not understand contracts cannot appreciate the benefits. Ideally, contracts would be simpler and easier to understand, but regulators don’t know the optimal complexity for each contract. Sellers know the value of the contract, but do not internalize the costs of complexity. To the contrary, sellers can benefit from making contracts more complex than necessary to obscure anti-consumer terms. This article proposes a new solution to this famous problem: a tax that sellers would pay to present a contract to consumers, coupled with a subsidy to consumers who comprehend contracts and share information. The tax would be proportionate to the cost consumers would incur if they invested in comprehending the contract. It would be assessed whenever sellers presented a contract, regardless of whether or not consumers signed. We show that this tax and subsidy solution would cause sellers to make their contracts simpler to reduce their own tax burdens. Thus, sellers would internalize the comprehension costs that they can currently impose on consumers. We demonstrate that sellers can be compelled to forego strategic obfuscation if this tax is paired with a subsidy to encourage consumer comprehension and information sharing. This tax and subsidy pairing would penalize inefficient contracts while minimizing the burden on efficient contracts. Inefficient contracts would thereby become financially unsustainable

Production of monodisperse polyurea microcapsules using microfluidics

Methods to make microcapsules - used in a broad range of healthcare and energy applications - currently suffer from poor size control, limiting the establishment of size/property relationships. Here, we use microfluidics to produce monodisperse polyurea microcapsules (PUMC) with a limonene core. Using varied flow rates and a commercial glass chip, we produce capsules with mean diameters of 27, 30, 32, 34, and 35 µm, achieving narrow capsule size distributions of ±2 µm for each size. We describe an automated method of sizing droplets as they are produced using video recording and custom Python code. The sustainable generation of such size-controlled PUMCs, potential replacements for commercial encapsulated systems, will allow new insights into the effect of particle size on performance

On the Quantitative Impact of the Schechter-Valle Theorem

We evaluate the Schechter-Valle (Black Box) theorem quantitatively by considering the most general Lorentz invariant Lagrangian consisting of point-like operators for neutrinoless double beta decay. It is well known that the Black Box operators induce Majorana neutrino masses at four-loop level. This warrants the statement that an observation of neutrinoless double beta decay guarantees the Majorana nature of neutrinos. We calculate these radiatively generated masses and find that they are many orders of magnitude smaller than the observed neutrino masses and splittings. Thus, some lepton number violating New Physics (which may at tree-level not be related to neutrino masses) may induce Black Box operators which can explain an observed rate of neutrinoless double beta decay. Although these operators guarantee finite Majorana neutrino masses, the smallness of the Black Box contributions implies that other neutrino mass terms (Dirac or Majorana) must exist. If neutrino masses have a significant Majorana contribution then this will become the dominant part of the Black Box operator. However, neutrinos might also be predominantly Dirac particles, while other lepton number violating New Physics dominates neutrinoless double beta decay. Translating an observed rate of neutrinoless double beta decay into neutrino masses would then be completely misleading. Although the principal statement of the Schechter-Valle theorem remains valid, we conclude that the Black Box diagram itself generates radiatively only mass terms which are many orders of magnitude too small to explain neutrino masses. Therefore, other operators must give the leading contributions to neutrino masses, which could be of Dirac or Majorana nature.Comment: 18 pages, 4 figures; v2: minor corrections, reference added, matches journal version; v3: typo corrected, physics result and conclusions unchange

Ibrutinib as initial therapy for patients with chronic lymphocytic leukemia

Background: chronic lymphocytic leukemia (CLL) primarily affects older persons who often have coexisting conditions in addition to disease-related immunosuppression and myelosuppression. We conducted an international, open-label, randomized phase 3 trial to compare two oral agents, ibrutinib and chlorambucil, in previously untreated older patients with CLL or small lymphocytic lymphoma. Methods: we randomly assigned 269 previously untreated patients who were 65 years of age or older and had CLL or small lymphocytic lymphoma to receive ibrutinib or chlorambucil. The primary end point was progression-free survival as assessed by an independent review committee. Results: the median age of the patients was 73 years. During a median follow-up period of 18.4 months, ibrutinib resulted in significantly longer progression-free survival than did chlorambucil (median, not reached vs. 18.9 months), with a risk of progression or death that was 84% lower with ibrutinib than that with chlorambucil (hazard ratio, 0.16; P<0.001). Ibrutinib significantly prolonged overall survival; the estimated survival rate at 24 months was 98% with ibrutinib versus 85% with chlorambucil, with a relative risk of death that was 84% lower in the ibrutinib group than in the chlorambucil group (hazard ratio, 0.16; P=0.001). The overall response rate was higher with ibrutinib than with chlorambucil (86% vs. 35%, P<0.001). The rates of sustained increases from baseline values in the hemoglobin and platelet levels were higher with ibrutinib. Adverse events of any grade that occurred in at least 20% of the patients receiving ibrutinib included diarrhea, fatigue, cough, and nausea; adverse events occurring in at least 20% of those receiving chlorambucil included nausea, fatigue, neutropenia, anemia, and vomiting. In the ibrutinib group, four patients had a grade 3 hemorrhage and one had a grade 4 hemorrhage. A total of 87% of the patients in the ibrutinib group are continuing to take ibrutinib. Conclusions: ibrutinib was superior to chlorambucil in previously untreated patients with CLL or small lymphocytic lymphoma, as assessed by progression-free survival, overall survival, response rate, and improvement in hematologic variables. (Funded by Pharmacyclics and others; RESONATE-2 ClinicalTrials.gov number, NCT01722487.)