See also the News feed of working papers as they are released.
Bound print copies of George Mason School of Law’s working paper series on law and economics are available in the Law Library. The bound set often includes initial drafts of papers. Search Mason’s Classic Catalog to locate a working paper.
Recent Working Papers:
By Eric Claeys
This Article presents a natural rights justification for property rights, called “productive labor theory.” Productive labor theory sets forth a Lockean, labor-based case for property. It links property to the moral right to labor. But it departs from other, better-known renditions of labor theory by linking labor to human interests in flourishing. So construed, “labor” refers to a moral capacity, right, and responsibility to acquire and use ownable resources to produce constituent elements of survival or rational improvement. Productive labor theory shows how an interest-based theory of rights can justify an exclusive property right—and focus practical reasoning how to limit and adjust the right in different disputes.
But productive labor theory also deserves serious consideration because it helps shore up the property cathedral. In contemporary property scholarship, property rights suffer from two deep criticisms, and each of the two leading theories of property exacerbates one of them. Progressive property theories makes property more robust by connecting it to a moral ground--human flourishing—but to date such theories have also undermined the role of exclusive control in property. Leading economic theories justify strong rights of exclusive control, but they reopen important questions about whether economic efficiency can confer political legitimacy on a law. Productive labor theory puts property on flourishing-based grounds like those in progressive theories, but it shows also how rights of exclusive control link to flourishing. Productive labor theory also supplies the account of political legitimacy lacking in economic accounts of property—and in the process it may help supply foundations currently missing from economic property scholarship.
The Article illustrates using: the prima facie case for trespass to land; the common law privilege for necessity and the defense for adverse possession; Allemansrätt and other European rights to roam; state and local landmark regulatory schemes and the Penn Central decision; and Kelo v. New London and regulatory schemes authorizing the use of eminent domain to condemn and reassign private land for commercial redevelopment.
By Michael Habib, D. Bruce Johnsen
Active fund managers implicitly promise to research profitable portfolio selection. But active management is an experience good subject to moral hazard. Investors cannot tell high from low quality up front and therefore fear manager shirking. We show how the parties mitigate the moral hazard by paying the manager a premium fee sufficiently high that the manager’s one-time gain from shirking is less than the capitalized value of the premium stream he earns from maintaining his promise to provide high quality. Premium advisory fees act as a quality-assuring bond. Our model has a number of revealing extensions and comparative statics.
By Adam C. Smith, Todd Zywicki
Behavioral economics claims to have identified certain systematic biases in human decision-making with the implied assumption — sometimes leading to an explicit policy proposal — that these biases can only be corrected through centralized planning. While the appropriateness of policy corrections to perceived biases remains an open debate, far less attention has focused on the role markets already play in “nudging” consumers toward more mutually beneficial outcomes. We describe a process by which markets evolve over time to satisfy consumer preferences — or risk failure and removal from the marketplace. By organizing our understanding of markets in this dynamic, evolutionary sense, we expose a basic logic that dominates market transactions as they occur in practice; that is, the mechanisms that ultimately survive market competition tend to compensate for, limit, or otherwise reduce the incidence of bias. We explore empirical evidence for this argument in the market for consumer financial products.
By Adam Mossoff
This essay, which was solicited for a special book review issue of the Tulsa Law Review, discusses Christopher Beachamp’s Invented by Law: Alexander Graham Bell and the Patent that Changed the World (Harvard University Press, 2015). Beauchamp tells the story of Alexander Graham Bell’s invention, patenting, commercialization and litigation of the telephone. But his monograph does much more than this: it details the complex commercial, legal, social, and political contexts in which patented innovation functions as a commercial asset.
This essay examines the extensive historical details presented in Invented by Law in the context of today’s “smartphone war” — the patent war wrought by the wireless computing revolution. Professor Beauchamp brings much-needed historical data to a debate in which many commentators assert that patent licensing, complex uses of patents in multi-component products, and extensive litigation are allegedly new features of the high-tech economy arising from the digital revolution. Invented by Law disabuses anyone of this false belief. Beauchamp explicates how complex inventions driving innovation in business models, as well as widespread licensing of patents, were common features of the nineteenth-century innovation economy. More generally, Invented by Law presents a fascinating historical case study of technological and commercial innovation, litigation, and ensuing public policy debate in Congress and in the country at large. As the Cylons intoned in Sy Fy Channel’s Battlestar Galactica, “All of this has happened before, and all of this will happen again” — a theme about patented innovation convincingly presented by Beauchamp in Invented by Law as well.
This essay argues that neuroeconomic research on financial decisions should attempt to focus on standard models that relate to the behavior being studied. It particular, it argues that a key organizing concept for such research should be the stochastic discount factor. Focusing on such models will help to focus the research as well as suggest profitable extensions of the research. The improved models will help us to better understand and craft legal rules and institutions.
The tax preference for interest payments by corporations as compared to dividend payments is a long surviving feature of many tax systems. Many have argued that there is no reason for this preference and so it distorts the capital structure of corporations needlessly. This article argues that because the returns to equity are more positively skewed as compared to debt, individual investors will tend to value equity more than they would value it given only its mean and variance characteristics. The article goes on to argue that in the social aggregate only the mean and variance characteristics persist. As a result, this article argues that the tax preference for debt capitalization instead of equity capitalization may help to align social and individual incentives in investment. The article also discusses how other considerations might diminish or even reverse the sign of the optimal preference for debt. However, this article argues that it is not the case that there is no argument for such a preference based on the nature of the returns to debt and the returns to equity.
By Timothy Muris, Brady Cummins
In 1979, the Supreme Court began departing from strict rule of reason/per se categorization and by 1999 the Court made clear that the rule of reason was a continuum. With the Court providing little guidance on the details of the conduct for which truncated analysis is warranted, the FTC has attempted to fill this gap, focusing not on questions of market power but on the restraint itself. The Commission provided a basic structure for truncated analysis in 1988 Massachusetts Board, later modified in 2003 in Polygram. More recently, the federal antitrust agencies have sought to expand the class of conduct for which truncated analysis should apply in recent enforcement actions by the FTC involving real estate brokers and by the DOJ involving agreements between Silicon Valley tech companies not to cold-call each other’s employees. We argue that the agencies’ approach in these cases is not grounded on a reasoned analytical framework but instead relies on flawed reasoning through analogy. Truncation remains an important tool, both to promote efficient antitrust enforcement against those few restraints that can be condemned based on prior judicial experience and current economic learning without detailed and expensive consideration of market issues and to prohibit restraints that are shown through unambiguous direct evidence to cause substantial anticompetitive effects. Full consideration of the benefits and costs of challenged conduct remains the antitrust norm, and the government’s recent attempts to expand the scope of truncated analysis through reasoning by analogy should be dismissed as aberrations that do not warrant judicial recognition.
By Howard Beales, Timothy Muris
Since 1981, the FTC has attacked fraud systematically, successfully using the authority under Section 13(b) to obtain a permanent injunction “in proper cases” to freeze assets ex parte and to force disgorgement of ill-gotten gains. More recently, the Commission has asserted the authority to obtain redress routinely, including cases in which established national firms allegedly lack substantiation for their advertising claims. FTC efforts to obtain redress under 13(b) must confront other legislation passed in the 1970s, in particular, Section 19, which limits monetary relief to conduct a reasonable person would know is dishonest or fraudulent. Both injunction and redress authority were included as separate provisions in a bill that passed the Senate in 1971. Although an amended Section 13 was enacted in 1973, and Section 19 was enacted two years later, the inescapable inference from their common origin and the entire legislative history is that Congress did not intend to give the Commission blanket authority to obtain redress. Nevertheless, we argue that the use of 13(b) against fraud respects the carefully constructed congressional grant of authority to the Commission in part because fraud meets the knowledge test of Section 19. Moreover, using Section 19 alone would require three separate actions to attack a fraud successfully -- a preliminary injunction to freeze assets, an administrative action to determine liability, and then another, independent district court action to seek redress. As Congress itself recognized, district courts may be reluctant to grant preliminary relief when they cannot assure an expeditious resolution of the matter. Accordingly, we argue that fraud cases are “proper” under Section 13(b), but routine use of Section 13(b) to seek redress would read “proper” out of the statute.
I Can See Clearly Now: Lee Benham, Eyeglasses, and the Empirical Analysis of Advertising and the Effects of Professional Regulation
Lee Benham’s 1972 article, The Effect of Advertising on the Price of Eyeglasses, represents an early, highly influential example of the now common empirical methodology in law and economics where the variation between state laws permits natural “experiments” to study the effects of different approaches to regulation. Benham found that mean prices of eyeglasses in states that prohibit advertising by optometrists were $6.70 (25 percent) higher than in states that did not prohibit such advertising. Cross-section regression analyses also found significant increases in the price of eyeglasses in states with complete restrictions on advertising, with average prices in such states $7.48 higher. Benham’s main result was robust to the inclusion of a variable to control for entry restrictions. He also found that mean prices for eyeglasses in states that banned only price advertising were higher than in states with no restrictions, but lower than in states with complete advertising restrictions. These striking results challenged the existing conventional economic wisdom that the costs of advertising raised market prices. Benham provided tangible and concrete evidence of both the costs of economic regulation to consumers and the likely beneficiaries of such regulation.
The administrative state has become an increasingly dominant force in American jurisprudence, at times wielding its power even beyond the reach of judicial and legislative control. Notwithstanding the fact that many legal scholars, regulated entities, and politicians have lamented the expanding role of the administrative state, regulatory agencies are more frequently flexing their newly acquired muscle and acting in contravention to traditional notions of checks and balances.
In this Article, I examine a burgeoning administrative law phenomenon I term the “threat of law,” whereby an administrative agency unilaterally imposes its regulatory will on regulated entities outside of the traditional boundaries of its rulemaking authority. The regulatory body can exercise this threat of law by issuing regulations grounded in dubious statutory authority and daring regulated entities to challenge them in court. In the absence of Congressional action, regulated entities can be left with the options to comply with the disputable regulation, defy the regulation and face penalties and litigation, or fight an often protracted and expensive court battle to get the regulation overturned. The threat of law also ups the ante for an increasingly impotent Congress. By changing the status quo, the threat of law can push Congress to either act to change the questionable regulation or acquiesce.
In order to illustrate the tangible pressure this threat of law can inflict on affected regulatees, this Article focuses on recent actions taken by the Treasury Department in response to the growing tide of corporate tax inversions, whereby entities historically domiciled in the United States move their headquarters to lower-tax jurisdictions. Treasury issued expansive notices attacking inversion transactions, pushing their regulatory powers to the limit. Even though Treasury may have lacked the power to act without congressional intervention, its actions produced a threat of law that, at least temporarily, had the same chilling effect on transactions as a legitimately exercised force of law.
This Article will examine this attempt by Treasury to circumvent congressional action. It will explore the efficacy this threat of law can have on an agency’s ability to act swiftly in response to emerging challenges, particularly in the face of congressional gridlock. Moreover, this Article will address the implications an effective threat of law has on an agency’s statutory retroactivity powers, traditional notions underlying Congress’s perceived delegation of authority, and to the level of justiciability protections that these actions should be afforded.
Comment of the Global Antitrust Institute, George Mason University School of Law, on the India Department of Industrial Policy and Promotion’s Discussion Paper on Standard Essential Patents
This comment is submitted in response to the India Department of Industrial Policy and Promotion’s Discussion Paper on Standard Essential Patents and Their Availability on FRAND Terms.
Uber-Ized Corporate Law: Toward a 21st Century Corporate Governance for Crowdfunding and App-Based Investor Communications
By J.W. Verret
This Article begins with a thought experiment about how corporate governance of small public companies trading on new platforms—like crowdfunding portals (or alternatively, “crowdfunding exchanges”)—might be expected to evolve to make corporate governance easier and more flexible for users. New opportunities could involve increased use of default rules whereby shareholders or owners defer direct participation in governance (in line with the Bainbridge director primacy argument), subject to default participation rules developed on crowdfunding platform apps (in a multitude of ways, including through open source methods). They could also include more shareholder empowering regimes. In examining the heterogeneous corporate governance needs that crowdfunded firms are likely to have, this Article will link contributions from the New Institutional Economics, or “Theory of the Firm” Literature, to corporate entity formation to provide a flavor for the range of “outside the box” innovations that may be possible in a new and more competitive corporate chartering race free from the federal overlay.
Of all the claims made in this Article, the strongest is that increased use of arbitration—rather than litigation—to resolve shareholder claims against company defendants will be a necessary element to reinvigorated charter competition for crowdfunded firms. The SEC currently prohibits full use of arbitration of shareholder claims against companies. This Article argues that since antifraud actions under the Securities Exchange Act of 1934 and state corporate governance claims are now largely interchangeable, the SEC’s intransigence on arbitration, in spite of federal case law favoring arbitration generally, must be addressed to make state law arbitration a viable alternative means of adjudication for states that compete with Delaware as sources of business entity law.
The USA Patriot Act: Promoting the Cooperation of Foreign Intelligence Gathering and Law Enforcement
By Craig Lerner
The Patriot Act was in part intended to remove certain legal barriers to information sharing between the foreign intelligence and law enforcement communities. This Article considers changes to the Foreign Intelligence Surveillance Act of 1978 (FISA) and to grand jury secrecy rules. The changes to the FISA enhanced the authority of intelligence officers to pool information with prosecutors in the Department of Justice. The changes to the grand jury secrecy rules enhanced the powers of prosecutors to share evidence with intelligence officers.
Taken together, these provisions authorized greater collaboration among intelligence officers and law enforcement personnel, spawning litigation and public debate over the provisions' scope and constitutionality. Although the Patriot Act expanded the powers of government officials charged with responding to terrorist threats, this Article argues that those powers remain subject to meaningful controls. The Patriot Act shifted some of the duties of regulation from the judicial branch to the legislative and executive branches. Given that questions of national security and privacy rights, and their appropriate balance, are among the most important policy issues confronting the nation, it is appropriate, and even preferable, that such debates take place openly, and in our elected branches.
A central assumption in the theory of intellectual property is that no government actor calibrates IP rewards. That is, no judge calculates the social value of a patented invention or copyrighted work and then determines the corresponding amount of reward; the IP system is supposed to automatically match reward to contribution through market valuation. This assumption is important because, if judges had sufficient information to calculate the correct amount of reward, then it would be more efficient to give rewards in the form of taxpayer-funded prizes than in the form of monopoly rents.
Yet judges in fact routinely calibrate IP rewards based on judicial estimations of the value of a creator’s contribution. In copyright, decisions about the idea/expression dichotomy, fair use, and remedies routinely turn on explicit or implicit judgments about the social value of a work. In patents, the same thing happens with decisions surrounding claim construction, enablement, and remedies. The contradiction between these two points is what I call the “paradox of IP.”
This Essay does not offer a solution to this paradox. Instead, my argument is that the paradox underlies and explains the contrasting positions of opposing sides in many IP debates, ranging from claim construction to injunctive relief. At a deeper level, understanding the IP paradox gives theoretical substance to the longstanding debate between those who regard IP as a form of public regulation versus those who regard IP as a form of private property. From the perspective of the IP paradox, the property/regulation debate is about how much fine-tuned calibration the government can and should do. The property/regulation debate is intense and unsettled because it mirrors the conflict between the founding anti-calibration premises of the IP system and the empirical reality that our actual IP systems feature routine calibration by judges. Without resolving the underlying paradox, we cannot resolve the property/regulation debate.
By Howard Beales, Timothy Muris
Throughout most of the Federal Trade Commission’s (“FTC” or “Commission”) history, the agency has been condemned as ineffective. Indeed, the prestigious 1969 American Bar Association Report said that the FTC should either change or be abolished. The disastrous decade of the 1970s followed, in which the FTC tried to become the second most powerful legislature in Washington. The Commission then finally developed a bipartisan regulatory program, recognizing that the FTC was not the star player in the economy but had an important role in enforcing the rules that facilitate market interactions. Following the ABA report’s recommendation, the program’s consumer protection foundation was a systematic and aggressive attack on consumer fraud.
This Article discusses this modern FTC, providing details on programs involving fraud, conventional advertising, and privacy. We explain how, embracing a more limited role and recognizing its past mistakes, the FTC became one of the world’s most widely respected government agencies. Unfortunately, the agency has recently lost its way in regulating traditional advertising, threatening to restrict truthful information to consumers that is vital to the optimal performance of competitive markets. We also discuss the newest part of the FTC’s mission, protecting consumer privacy. The heart of the program has been to prevent harmful misuse of sensitive information, most notably the National Do Not Call Registry, one of the most popular government initiatives ever. In attempting to broaden the basis for protection of privacy, the agency currently threatens to impede rapidly evolving information technology markets.
By Craig Lerner
Daniel Farber’s Lincoln’s Constitution is framed around two broad issues: First, did the South have the right--either under the Constitution or some higher law--to secede; or, as Lincoln argued, is “perpetuity . . . implied . . . in the fundamental law of all national governments”? Second, were Lincoln's actions to preserve the Union consistent with the Constitution; or did he exceed the powers delegated to him as the chief executive?
Farber in large part defends Lincoln’s acts as President. He writes, “It was Lincoln's character--his ability, judgment, courage, and humanity--that brought the Union through the war with the Constitution intact.” But this assumes that Lincoln saved the Constitution, rather than destroyed it. If the Constitution was originally a voluntary association of separate sovereigns, then he illegally engrossed the nation in a war that claimed over six hundred thousand lives. We may add violations of civil liberties to his sins, although at that point it would be hard to plunge his reputation any farther into disgrace. On the other hand, if Lincoln was right that the Constitution foreclosed secession and authorized the use of force to suppress any such movement, the entire problem of civil liberties needs to be re-gauged.
The Review concludes that the Founders did not regard secession as a constitutional right, but also that they could not have imagined that the federal government under the Constitution they had created would be so strong and so motivated as to prevent one-third of the states from withdrawing and reconstituting a government. Lincoln himself anticipated that a Union victory in the Civil War would give rise to a “new birth of freedom,” and he essentially cast himself in the role of a founder. The principles on which the Lincolnian regime were to be founded were not identical to those of the original regime, for most importantly the scourge of slavery would be eliminated. In this respect, as well as in laying the framework for a decisive shift in the relative power of the state and Federal Governments, it is perhaps not quite correct to say, as Farber does, that Lincoln “saved” the Constitution: he transformed it.
Comment of the Global Antitrust Institute, George Mason University School of Law, on the Proposed Revisions to the People’s Republic of China Anti-Unfair Competition Law
This comment is submitted in response to the Legislative Affairs Office of the State Council of the People’s Republic of China’s public consultation on the draft revisions to the Anti-Unfair Competition Law (AUCL). We submit this comment based upon our extensive experience and expertise in antitrust law and economics.
By Nelson Lund
This very short essay elaborates on Justice Alito’s comment that the Supreme Court’s decision on same-sex marriage in Obergefell v. Hodges, is evidence of “the deep and perhaps irremediable corruption of our legal culture’s conception of constitutional interpretation.” One contributor to this corruption has been the success of Jack Balkin’s “living originalism,” which flies the false flag of originalism in order to advance the progress of living constitutionalism. Balkin has begun to enlist prominent originalists, including Steven Calabresi, in this operation, which will make it harder for the next generation of law students to learn what genuine originalism is.
Annotating “The Adventure of the Norwood Builder” for the 2015 edition of the Green Bag Almanac & Reader was quite fun—enough fun that even before it was in print we’d decided to annotate another Sherlock Holmes story for the 2016 Almanac & Reader. We settled on one of the earlier stories, “The Reigate Puzzle” (aka “The Reigate Squire” and “The Reigate Squires”). And then we enlisted (as we did last year) an eminent Sherlockian to introduce the story and a gratifyingly diverse congregation of others to annotate it. What we present in the following pages is not, of course, the last word on anything about “The Reigate Puzzle.” Indeed, one of the joys of Sherlockian studies (like legal studies) is that no one ever gets the last word, just the latest. We would like to think, however, that we have collected quite a few interesting and entertaining additions to Sherlockian scholarship—including several relating to the law and legal culture—and at least as many eloquent yet compact restatements of some of the best of preexisting scholarship.
By Ross Davies
During the late 19th and early 20th centuries, The Strand Magazine printed Arthur Conan Doyle’s byline many, many times—on dozens of Sherlock Holmes stories, and also on a wide range of other works. Only once, however, did the magazine publish a Doyle-signed work that was purely graphical: the pig (yes, it is a pig) pictured above. He drew the pig in response to a challenge The Strand issued to several Victorian-era celebrities. Full details are given in an article—“Pigs of Celebrities,” by Gertrude Bacon—published by The Strand in March 1899. The gist of the challenge is easily summarized: Lift a pen and close your eyes. Keep them closed while drawing a pig. Autograph your work and send it to us. The Green Bag is renewing that challenge. It is open to all our readers, every one of whom is a celebrity in the eyes of the Bag’s editors. Please use the form (and follow the rules) on page 547 below. We will: (1) post on our website all, or at least most, pigs submitted in accordance with the rules (we reserve the right to exclude mean-spirited and copyright-infringing pigs), and (2) publish some exemplary pigs in a future Almanac & Reader, or issue of the Green Bag itself, or perhaps both.