Paying for Performance in Bankruptcy: Why CEOs Should Be Compensated with Debt

While managerial performance always plays a critical role in determining firm performance, a manager\u27s importance is elevated during bankruptcy. A manager in bankruptcy both runs the firm and helps form a plan of reorganization. In light of this critical role, one would expect that bankruptcy scholarship would place considerable emphasis on the role of CEO compensation in incentivizing managerial performance in bankruptcy; however, the opposite is true. Bankruptcy scholars and practitioners tend to emphasize other levers of corporate governance, such as the role of debtor-in-possession financiers, rather than the importance of CEO compensation. This Article seeks to revive CEO compensation as an important governance lever in bankruptcy. First, the Article examines current ideas and practices of managerial compensation in bankruptcy and finds them wanting. The Article next proposes a novel bankruptcy compensation plan-debt compensation-that provides better incentives for managers to perform efficiently. By granting managers a fixed proportion of unsecured debt in the bankrupt firm, debt compensation creates valueenhancing incentives similar to the incentives created by the stock grants and stock options that are heavily employed by solvent firms to compensate managers

Law and Macroeconomics: The Law and Economics of Recessions

In this Article, I offer a macroeconomic perspective on law that reshapes the microeconomic perspective that currently dominates law and economics. I argue that, first, the economy works one way in ordinary economic conditions, in which supply capacity determines output, and a different way when interest rates are zero. At the zero lower bound on short-term interest rates, spending demand determines output. Second, because the economy functions differently at the zero lower bound, a law causes one set of effects at the zero lower bound and a different set of effects at other times. And third, because the same law has diferent effects at different times, law should be different at the zero lower bound than in other times. Specifically, law should do more to promote spending when the macro-economy is characterized by zero interest rates than in ordinary economic conditions. Because the stakes of recessions in which interest rates hit the zero lower bound are so high-for instance, tens of trillions of dollars in lost output, countless lives impaired, and a much higher likelihood of political upheavals like Donald Trump\u27s ascendancy to the U.S. Presidency-I argue that the (significant) costs associated with introducing macroeconomics into law are worth bearing

Efficient Time Bars? A New Rationale for the Existence of Statutes of Limitations in Criminal Law

This paper proposes a novel normative economic explanation for statutes of limitations for criminal offenses. Because potential criminals tend to discount the future at higher rates than society, punishing crimes long after they are committed will be inefficient. Punishments after a long lag have only a nominal deterrent effect, while they may cost society substantial sums. The model presented in the paper derives the optimal statute of limitations for a crime by modifying the standard model of public enforcement of law to consider lags between crime and punishment. In addition, numerical simulations of the model suggest that some U.S. statutes of limitations are generally consistent with optimal limitations (probably serendipitously). Finally, the paper employs the model to critique several tenets of the law concerning statutes of limitations

Law and Macroeconomics: The Law and Economics of Recessions

In this Article, I offer a macroeconomic perspective on law that reshapes the microeconomic perspective that currently dominates law and economics. I argue that, first, the economy works one way in ordinary economic conditions, in which supply capacity determines output, and a different way when interest rates are zero. At the zero lower bound on short-term interest rates, spending demand determines output

Is Secured Debt Used to Redistribute Value from Tort Claimants in Bankruptcy? An Empirical Analysis

Many scholars question the priority enjoyed by secured debt in bankruptcy. They fear that secured debt will be used to inefficiently redistribute value away from preexisting unprotected creditors of a firm. These scholars advocate a host of legal innovations, such as superpriority for tort claimants with respect to other creditors, to mitigate the redistributional problem. Other scholars minimize the redistributional problem, however, and argue that priority for secured credit is efficient. To help resolve this debate, this Article examines the redistributional theory from an empirical perspective. In particular, it focuses on secured debt usage by publicly traded firms facing large tort liabilities ( high-tort firms). In theory, secured debt should be attractive for high-tort firms because they have a large class of unsecured and uncovenanted creditors (tort claimants) exposed to redistribution in bankruptcy through the use of secured credit. The Article\u27s empirical analysis contradicts the redistributional theory\u27s prediction, however. High-tort firms have unusually low amounts of secured debt. Although this result is very difficult to explain under the redistributional theory, it can readily be explained according to other theories of secured debt. Several important policy implications for bankruptcy priorities follow from these findings

Learning Through Policy Variation

Rationalist analysis of policymaking, exemplified by cost-benefit analysis, ignores the variance in outcomes associated with policies and seeks to maximize expected outcomes. Burkeans, by contrast, view policy outcome uncertainty negatively. The Burkean approach is echoed in the precautionary principle, which argues that policies with hard-todetermine or high-variance outcomes should be avoided. Both approaches are the subject of vast literatures. This Article argues that both approaches are wrong. When policies can be reversed in future periods, variation in the outcomes associated with a policy is a good thing. Reversibility means that the downside risk of high-variance policies is limited; policies with unexpectedly bad outcomes can be changed in the next period. The upside of high-variance policies, by contrast, may last indefinitely, since policies with unexpectedly good outcomes will be retained. Thus, when policies are reversible, policymakers should deliberately choose policies with uncertain outcomes, other things equal. The Article also examines the assumption of policy reversibility. It shows that the most important source of irreversibility for policy analysis is irretrievable “sunk costs” rather than the potential for catastrophic outcomes or policy inertia. As a result, policies are more reversible than commonly appreciated. The Article then examines optimal policymaking under irreversibility. Under extreme irreversibility, conservatism of a particular sort, called the “real options” approach, constitutes the best policy. More generally, the Article argues that the appropriate attitude toward policy variance depends upon the reversibility of policy. This analysis illuminates many puzzles in constitutional law and institutional design, such as the puzzling difference between entrenched statutes, which are unconstitutional, and sunset clauses, which are permitted. The Article concludes with recommendations to encourage policymakers to use variance more effectively

Bounded Institutions

This Essay examines two alternative designs for hierarchical institutions: “bounded” and “unbounded.” In a bounded structure, a principal decides on a bounded aggregate numerical allocation, and then an agent makes the allocation to an underlying subject population while complying with the bound. In an unbounded structure, the principal provides no aggregate numerical cap, but instead provides some other form of guidance to the agent regarding allocation. An example of a bounded institution is grading to a pre-arranged curve (“X students receive As”), while an example of an unbounded institution is granting a particular grade to each student who meets a particular threshold (“each student who displays mastery of the material receives an A”). Bounded and unbounded institutions are common in many legal contexts and differ in their strengths and weaknesses. From the principal’s perspective, bounded institutions are increasingly desirable to the extent that (a) there is a homogeneous and large subject population, (b) the agent is likely to be biased or to make systematic errors, and (c) it is difficult to devise other rules to guide the agent’s decision. If agents are biased but otherwise share preferences with the principal—and the principal knows the underlying subject population’s traits—then bounded institutions can produce the precise outcome that the principal wants even though neither the principal nor the agent is fully informed or free of error. The Essay applies these insights to government appropriations, environmental law, and administrative law (among other areas). Consider, for example, funding scientific research through the National Science Foundation (NSF). Congress should give the NSF a fixed (bounded) budget if it thinks the NSF is biased in favor of funding scientific research and the distribution of quality of scientific research proposals is relatively predictable from year to year. If the NSF always wants to fund the same projects that Congress would, by contrast, then Congress should tell the NSF to fund all research projects the NSF deems worthy, thereby giving the NSF an unbounded source of funding