Focus on Fairness, Efficiency, and the Law: Response. Efficiency and Equity: What Else Can Be Gained by Combining Coase and Rawls

Professors Swygert and Yanes seek to bring efficiency and equity to bear explicitly on the economic analysis of law by merging Rawlsean social contract philosophy into law and economics\u27 basic premise, the Coase Theorem. We are in complete agreement with Swygert and Yanes that good legal policy should be concerned with both efficiency and equity, and we welcome their attempt to merge the two as a useful step in an important debate. Ultimately, though, we are unconvinced by their argument as it currently stands for two reasons. First, by focusing only on the way in which their approach might affect how the law regulates the exchange of goods or legal entitlements (i.e., contract law), the authors provide no explanation of how their approach could be used to determine the initial allocation of goods and legal entitlements (i.e., property law). If legal policy is to take equity as seriously as efficiency, it is critical that equity be considered when legal entitlements are assigned, not merely when parties choose to trade their entitlements. Consequently, the omission of any discussion of how entitlements might be initially assigned under the authors\u27 proposed theoretical framework is of critical importance

Not Just Efficiency: Insolvency Law in the EU and Its Political Dimension

Certain insolvency law rules, like creditors’ priorities and set-off rights, have a distributive impact on creditors. Distributional rules reflect the hierarchies of values and interests in each jurisdiction and, as a result, have high political relevance and pose an obstacle to reforming the EU Insolvency Regulation. This paper will show the difficulty of reform by addressing two alternative options to regulate cross-border insolvencies in the European Union. The first one is the ‘choice model’, under which companies can select the insolvency law they prefer. Although such a model would allow distressed firms to select the most efficient insolvency law, it would also displace Member States’ power to protect local constituencies. The choice model therefore produces negative externalities and raises legitimacy concerns. The opposite solution is full harmonisation of insolvency law at EU level, including distributional rules. Full harmonisation would have the advantage of internalising all externalities produced by cross-border insolvencies. However, the EU legislative process, which is still based on negotiations between states, is not apt to decide on distributive insolvency rules; additionally, if harmonisation includes such rules, it will indirectly modify national social security strategies and equilibria. This debate shows that the choice regarding power allocation over bankruptcies in the EU depends on the progress of European integration and is mainly a matter of political legitimacy, not only of efficiency

Incomplete Contracts with Asymmetric Information: Exclusive v. Optional Remedies

Law and economics scholars have always had a strong interest in contract remedies. Perhaps the most explored issue in contract law has been the desirability of various contract remedies, such as expectation damages, specific performance, or liquidated damages, to name the most common. Scholars have been debating for years, from various perspectives, the comparative advantage of these remedies. Yet, most scholars have assumed that each of these remedies is exclusive, and their work has compared a single remedy contract to another single remedy contract. Interestingly, an analysis that assumes these remedies are optional (or cumulative) has not yet been explored, in spite of the fact that contract law provides the non-breaching party with a variety of optional remedies to choose from in case of a breach, and in spite of the fact that parties themselves write contracts which provide such an option. In this paper we attempt to start filling in this gap by studying the relationship between these remedies. Specifically, we study the conditions at which a contract that grants the non-breaching party an option to choose from optional remedies is superior to an exclusive remedy contract. We show that under conditions of double-sided uncertainty and asymmetric information between a seller (who might breach) and a buyer (who never breaches) the interaction of the parties\u27 distributions should determine whether a contract provides for exclusive or optional remedies. Specifically, if the buyer\u27s conditional expected valuation is larger than the seller\u27s conditional expected valuation (in both cases - conditional that their expected valuation is above the buyer\u27s mean valuation), then a contract which provides the buyer an option to choose between liquidated damages or specific performance (or actual damages) is superior. Our analysis in this paper informs transactional lawyers of the relevant economic factors they should consider when deciding the optimal composition of remedies in a given context. Moreover, our analysis is relevant for courts that interpret contracts because it will help them to better understand whether rational parties would have agreed that a particular remedy would be an exclusive remedy or an optional remedy when the language of the contract is ambiguous. Lastly, our analysis provides yet another economic rationale for why courts should enforce parties\u27 liquidated damages clauses even if it seems ex-post over, or under, compensatory. We present a model which shows when parties will agree on a non-exclusive liquidated damages clause. Under such a contract the parties stipulate ex-ante that the buyer will have the option to choose upon breach whether she prefers an optional remedy, such as actual damages or specific performance, to the pre-determined liquidated damages. We focus on the ex-ante design of the contract in light of the new information that the parties anticipate they will gain after they draft the contract. Therefore, we assume that no renegotiation or investments are involved. We demonstrate the optimal way to design contract clauses which takes advantage of the information that the seller and the buyer receive between the time they enter into the contract and the time of the actual breach. We further suggest that parties indeed use such clauses and that courts honor them. After laying out the basic model we provide some extensions to it. As is well known, an exclusive liquidated damages contract is equivalent to granting the seller a call option to breach and pay, where the exercise price is equal to the amount of the agreed liquidated damages. What is perhaps less known is that a non-exclusive, or optional, contract, where the buyer can choose performance, is equivalent to giving the buyer a consecutive call option with the same exercise price. Yet, the consecutive call option to the buyer does not have to have the same exercise price but can rather have a higher one. We call this new contract a two-price contract and show that it is even more efficient than the basic contract we have explored before. Next, we introduce more rounds of sequential options and show that while the regular ex-ante contract can achieve on average about 4 Indeed, in an environment of asymmetric information renegotiation costs are high. More on this below. 90% of the first-best allocative efficiency, an n-rounds contract approaches the first best, as n goes to infinity. We show numerically that within just 4 rounds, 96% of the allocative efficiency can be achieved. Section two describes the legal background against which we have designed our model. Section three surveys the literature that evaluates contract remedies from an economic perspective. Section four presents a simple model with two-sided incomplete information and with a liquidated damages clause. In section four we compare the performance of a regime with optional remedies with a regime of exclusive remedy and then determine the conditions at which each regime should be applied. Section five discusses some interesting extensions meant to approach the first-best allocative efficiency. The appendix provides a more rigorous mathematical demonstration of the model

The legal framework for financial advertising:curbing behavioural exploitation

Policy makers and behavioural finance scholars express growing concern that marketing practices by financial institutions exploit retail investors’ behavioural biases. Investor protection regulation should thus address these marketing practices and include mechanisms curbing behavioural exploitation. That raises the question whether the marketing communications regime of the new Markets in Financial Instruments Directive can live up to this demand. This article develops a regulatory model that integrates behavioural finance insights into the new marketing communications regime. It then determines how regulatory authorities can apply this model when they interpret and apply specific regulatory requirements. It demonstrates how a regulatory authority or a court can translate empirical behavioural finance research findings into legal arguments when assessing whether marketing practices can significantly distort a model investor’s decision-making process. The article further establishes that the detailed requirements imposed on investment firms by the new Markets in Financial Instruments Directive are necessary in order to protect investors from behavioural exploitation. Finally, the article submits policy proposals that aim to protect investors more effectively from behavioural exploitation

Agriculture as a phosphorus source for eutrophication in the north-west European countries, Norway, Sweden, United Kingdom and Ireland: a review

In the north-western European countries Norway, Sweden, United Kingdom (UK) and Ireland, variability in the forms, amounts and timing of phosphorus (P) loss from agricultural land is related to national differences in climate, soil, hydrological conditions and agricultural production. The dissolved form of P constitutes 9–93% of the total phosphorus (TP) in water, subsurface drainage can contribute 12–60% and surface erosion 40–88% of TP transfer. TP export in small agricultural streams is generally in the range 0.3–6 kg/ha/year, with the highest losses in Norway and UK. All four countries are complying with the EU Water Framework Directive and developing a range of measures based on P source with transport controls over P losses. A decreasing trend in TP losses has been detected in agricultural streams following the introduction of measures to reduce erosion in Norway. Average P concentrations in Swedish streams have shown a reduction of nearly 2% per year since 1993 as a result of measures introduced in southern Sweden. However, in two large rivers in agricultural regions of Sweden, the concentrations of suspended solids (SS) and TP were shown to increase by 0.4% and 0.7% per year, respectively, over the period 1975–2004, possibly as a result of climate change. It is too early to detect trends in agricultural contributions to P in surface waters as a result of catchment-sensitive farming (CSF) in the UK and Ireland

Long-term trends in phosphorus leaching and changes in soil phosphorus with phytomining

Few mitigation strategies exist to reduce phosphorus (P) losses in leachate once soil P has built up. Phytomining, or harvesting a crop without application of fertilizer P to create a negative P balance, has been proposed as a strategy for lowering soil P levels and preventing P loss to runoff and leachate. In this study crops were grown and harvested over 7 to 16 years in undisturbed soil columns (105 cm [41 in] deep) with contrasting textures (loamy sand, sandy loam, silty clay loam, and clay) and high P levels, while P loss in leachate was measured. Soil test P in the topsoil (0 to 20 cm [0 to 8 in] depth) was significantly decreased from the beginning to the end of the study for all soils, while a significant decreasing trend in dissolved reactive P in leachate was only observed in one soil. Downward movement of P from the topsoil to deeper layers was indicated to occur in three out of four soils. Although phytomining lowered soil test P by 11% to 37% in topsoils over the 7 to 16 year period of the study, results indicate that soils with P content well above agronomic optimum may take a much longer time to reach the agronomic optimum.</p