As Geoff noted the other day, The First Annual GMU / Microsoft Annual Conference on the Law and Economics Innovation is now just one week away. It will be Friday, May 4th at GMU Law from 9 am to 4pm. This year’s topic is “The Regulation of Innovation and Economic Growth.” Conference papers and discussion will focus on the innovative process itself and the question of how regulation, particularly antitrust and intellectual property regimes, might foster or impede growth.

Geoff and I, along with a ton of others who had a substantial role in putting this project together, truly hope that this will be the first in a long running collaboration between GMU and Microsoft which will produce a forum for academics, regulators, industry representatives, and policy makers together to discuss this important topic and present research.

As exciting as it is to have a hand in organizing the event, and as happy as I am that it will take place right there at GMU Law, the best thing about this conference is by far the quality of program that Geoff was able to pull together. I will admit to our faithful TOTM readers that Geoff deserves all the credit for this. I’m thrilled to be able to participate in one of the panels myself along with Jon Baker, Dan Spulber, and Keith Hylton — all economists whom I respect greatly and whose work I am familiar with. Here’s the entire conference agenda, which includes the following speakers, commentors, and moderators:

• Jonathan B. Baker, American University Washington College of Law
• Ronald A. Cass, Dean Emeritus, Boston University School of Law
• Robert D. Cooter, University of California at Berkeley School of Law
• Keith N. Hylton, Boston University School of Law
• Marco Iansiti, Harvard Business School
• Bruce H. Kobayashi, George Mason School of Law
• Douglas G. Lichtman, University of Chicago Law School
• Stan J. Liebowitz, University of Texas/Dallas School of Management
• Stephen E. Margolis, North Carolina State College of Management
• Randal Picker, University of Chicago Law School
• Howard A. Shelanski, University of California at Berkeley School of Law
• Daniel F. Spulber, Kellogg School of Management
• Joshua D. Wright, George Mason University School of Law

The papers, including my own, can be downloaded here.

For those of you law and economics types heading to ALEA in Boston for the weekend, there is plenty of time to join us Friday and make it to Boston on time for dinner Friday night.  Conference registration is free.  Come join us and make sure to say hello. For those of you who cannot make it, I plan on doing some “not-so-live” blogging after both the GMU/Microsoft Conference as well as ALEA over the weekend.

There’s been enough attention paid to the question of whether Steve Levitt is ruining economics.  I did my share to contribute to the focus on this question.  My bad.  But now even Levitt himself has responded to Scheiber’s claim that he is ruining economics.  His response: “No I haven’t, and you wouldn’t know it if I had because you don’t know any economics.”  Ok, that is paraphrasing but I think captures the spirit of the response.

Levitt is unnecessarily defensive in his post, taking a few shots at Scheiber’s lack of formal training,  amateurish attempts to write about economics in the past, failure to do homework about Emily Oster’s work, and that the closest he got to the Harvard economics program was dating somebody in it.  Anyway, the Scheiber stuff is all atmospherics.  Who cares what he has to say about Levitt or his work.  The issue here worth discussing is whether fascination with “clever” identification strategies is good or bad for economics? 

Levitt addresses that too:

The incredibly important point that he misses is that often being clever is the way one cracks an important problem. He can denigrate the questions I have made progress on tackling, but it seems to me that understanding how crime responds to punishment, why crime fell in the 1990s, why Blacks are lagging Whites so badly educationally and economically, whether firms profit maximize, whether campaign spending affects election outcomes, and whether elected officials follow the will of the electorate are pretty reasonable topics for an economist to study. Sure, my approach to each of these was different than what everyone else was doing, but the questions I have asked have (usually) had both serious policy questions and economic issues at their heart, and I delivered some answers when others were not.

Well said.  I’m a little perplexed that there is a debate about whether providing empirically sound answers to important questions (maybe narrow and important, but important) is good or bad for economics.  Geoff’s comment to my previous post nails this:

The folks like Levitt who do this work, who can perceive problems and think through creative solutions to them, are applying real economic intutition. They may use a lot of math, to be sure, but the underlying logic is generally quite simple (not as in “easy” but as in “not-complicated”) and complex mathematics is not necessary to explain or to understand what’s going on. It is economics in the style of Tullock and Alchian and Coase. These are real lessons learned through application of a powerful system of analysis.

But to the motivation of the title of this post.  I don’t think “clever” research is a real challenge for economics.  I think that debate is mostly a distraction.  The challenge is not about Levitt at all.  The biggest challenge to the relevance of economics research moving forward is the fetishization of formal mathematical theory that sometimes distracts researchers from working on problems that help explain real world phenomena.  There is, of course, an optimal amount of valuable theoretical research that should be done.  Formal theory is important to the development of economics as well and always will be.  But in my view, the ratio of theory to empirics in modern economics, in my view, is far too high. 

One might thnk that at least one important consequence of Levitt’s research agenda, in addition to adding to our economic knowledge (which used to be enough, didn’t it?), will be a contribution to making popular again economics that is more connected to explaining real world phenomena of all types with economic intuition, models, and data.  If that happens, Levitt isn’t ruining economics.  He’ll be saving it.  Or at least making it more relevant.  And definitely more fun.  If Levitt is going to take the brunt of the attack for “clever” research, at a minimum, we ought to be willing to give credit for sending the pendulum back towards the empirically-oriented side of the spectrum by making it “cool” to worry about the real world again.

It is apparently vogue to ask whether Steve Levitt is ruining economics? The serious question behind all of this is whether today’s economists have become too enamored with cute and clever questions rather than the day’s “big” questions.  I’ve already gone on the record on this one with a comment to a post over at Co-Op by Frank Pasquale:

Many people conducting “cute” research are quite aware of the details of legal and other institutions and in fact often rely on these details to construct instruments for their econometric analysis.  I am sympathetic to the view that the economics profession as a whole might be better off with greater attention paid to larger problems. But for what it is worth, do not agree with the claim that Freakonomics is in the least bit responsible for this trend, and disagree strongly with the proposition that Levitt or Freakonomics has made economics worse off.

Greg Mankiw offers a bit of a luke-warm answer to the question, noting that it is “disconcerting, to a degree” that “young economists today are doing Levitt-style economics and fewer are studying the classic questions of economic policy,” but concludes that he is not too worried about it because economics will correct itself because of diminishing returns to call research programs and strong incentives to address the “big ones.”

I prefer Joshua Angrist’s less apologetic response to Scheiber’s attack defending instrumental variables, natural experiments, and even cuteness, in the TNR (HT: Marginal Revolution):

I’ll plead guilty, however, to being especially pleased when students manage to come up with clean identification–that is, they have a convincing strategy for uncovering causal effects.  Clean identification is not a fetish; without it, little of value is learned.  On this score, our students typically do better than the empiricists of H.G. Lewis’s generation … .
Second, in his rush to tar some up-and-comers with the “cute-o-nomics” brush, Scheiber misses a central feature of the clean-identification research agenda, best explained by example.  One of the enduring scientific and policy questions in Labor economics is the sensitivity of hours worked to changes in pay (this matters for tax policy, for example).  The best evidence labor economists have on the relation between wages and hours worked comes from a small experiment (by Ernst Fehr and Lorenz Goette) involving the wages of bicycle messengers in Switzerland.  The second best comes from a study of stadium vendors by Gerald Oettinger.  Who cares about the riders of Veloblitz or snack sellers at Camden Yards?  We care because economics is predicated on the notion that a few simple principles explain behavior in many settings.  These studies produce results that are convincing and may well be general, though, as always in science, it will take replication to know for sure.

I like that answer alot.  While I’ve written here before about the potential harms of fetishizing formal mathematical theory rather, especially with respect to law and economics, I see that as a separate problem altogether.  Economists need not apologize for uncovering clean causal relationships  in less complex settings.   There is no shame in adding to our theoretical and empirical understanding of small subjects with the hopes of generalizing to larger phenomena.

For that matter, though I’m a little late to the party, academic economists dont need to be defensive about playing parlor games from time to time either (If the bar for academic work is immediate policy relevance, how much law review scholarship do you think would qualify?).

Over at PrawfsBlawg, Matt Bodie is soliciting information to compile a list of legal scholarship placed this spring submission cycle. If you want your piece included see here.

Today, the SEC filed securities fraud charges against two former Apple senior executives for matters pertaining to Apple’s backdating scandal.  The SEC settled its claims against former Apple CFO Fred Anderson at the same time it filed suit.  Anderson will pay about $3.5 million in disgorgement and penalties.  Former Apple General Counsel Nancy Heinen did not settle with the SEC.  Hmmm.

A few comments:

1.  Heinen did not settle.  Why?  If she was given the option to settle, and she did not take it, she was, in my view, foolish.  I wonder, however, if she was not even given the option b/c the SEC wanted to make an example of her.  The SEC is not big on wasting resources on litigation when a settlement is possible, but….

2.  Anderson apparently did not have to agree to an O&D bar (a bar from serving as an officer or director in the future) in order to reach a settlement with the SEC.  I find that scandalous.  As a general matter, an O&D bar is a standard feature (it seems) in the smaller SEC fraud enforcement actions.  Why not here?  I cannot say that I *want* Mr. Anderson to continue being an officer and/or a director of a publicly traded issuer.  (He currently is chairman of the audit committee of eBay.  Scary, that.)

3.  Some academics have questioned whether backdating constitutes fraud.  The SEC’s complaint lays out the facts responsive to that query very well.  Essentially, the SEC says that Heinen knew she was acting for purposes of deceiving others when she drafted board minutes for meetings that never took place and when she omitted information from other board minutes to avoid the auditors figuring out that the options were backdated.  Heinen did something deceitful that materially impacted Apple’s financial statements (by understating expenses dramatically).

4.  The SEC’s complaint indicates that the board members *knew* they were backdating.  That is a huge, huge problem for me.  When Heinen faxed to her directors resolutions that were dated six months prior, surely the directors asked questions.  If someone asked me to sign a document today that was dated January 1, 2007, I would ask why the date does not match today’s.  Yet the directors signed off of the backdated resolutions like a pack of lemmings.  That slays me.  (Actually, what slays me is that the Apple directors, who facilitated Heinen’s fraud, are not front and center in the SEC’s enforcement actions.  Heinen papered the backdating; without the board sign-off, Heinen could not have consummated the fraud.)

5.  Where does this leave Steve Jobs?  Will the SEC circle back around and come after him?

Juan Pantano, a Ph.D. Candidate in the excellent UCLA Economics Department, has a paper that some of our readers might be interested in entitled: Unwanted Fertility, Contraceptive Technology and Crime: Exploiting a Natural Experiment in Access to the Pill.  Here’s the abstract:

A blossoming literature in the U.S. examines the role of abortion legalization on the criminality of the cohorts born before and after this controversial law change. Seminal work by Donohue & Levitt (2001) claims to explain over 50% of the recent decline in U.S. crime rates with the legalization of abortion undertaken in the early 70s. In the same spirit, I exploit another natural experiment induced by policy changes associated with the contraceptive revolution of the 60s. In particular, after the introduction of the contraceptive pill in 1960, different states maintained some form of required parental consent to obtain a doctor’s prescription for women below the age of majority. These restrictions were lifted differentially across states during the 60s and 70s. This differential timing of contraceptive liberalization induces exogenous variation that can be used to identify the causal effect of unwanted fertility on crime. Preliminary results, consistent with the hypothesis raised by the work of Donohue and Levitt, show that greater flexibility to avoid unwanted pregnancies reduces crime two decades later, when undesired children would had reached their maximum criminal activity.

I am a pragmatist and a capitalist. I don’t wear a yellow Live Strong bracelet; I give money to various cancer medical centers.  I don’t wear a pink ribbon; I mail checks to the research centers that work on treatments for breast cancer.  That’s just how I am.  In the words of my college-aged running buddy Jon, “that’s how I roll.”

But I made the mistake of reading in the news yesterday the firsthand accounts of students who were in the Virginia Tech classrooms under siege.  These students told of waiting to get shot, of wondering what it would feel like, and of watching their friends get shot and hearing from the shot students a “quick moan, or a slow one, or a grunt, or a quiet, reserved yell from one of the girls.”  God in heaven.

I cannot write a check big enough to ever fix that.  So, for today, I am not Professor Nowicki in the dark suit and heels, blathering about corporate law, dutifully writing checks for important causes.  I am Elizabeth Nowicki, a resident of the Commonwealth of Virginia, wearing a maroon shirt and orange earrings, because that is all I have to offer right now in support of the devastated Virginia Tech students, families, faculty, and staff.

Brian Leiter makes the following request:

I’ve heard from many readers that when you search Brian Leiter you don’t in fact get my law school ranking site as one of the top results, even though you get my blogs, my homepages, and my philosophy ranking site.  So, dear reader with a blog, please post a link to Brian Leiter with the hyper-link to www.leiterrankings.com, for the benefit of all those souls in Cyberspace in search of my law school ranking site.  Indeed, you can simply copy this post and repost it at your site.

Many thanks!

Done.

Kate Litvak (UT Law, and friend of TOTM) , whose excellent paper (discussed around the blogosphere here and here), “The Effect of the Sarbanes-Oxley Act on Non-US Companies Cross-Listed in the US,” has been selected as the best paper for the forthcoming special issue of the Journal of Corporate Finance associated with the Boundaries of Regulation conference. This is quite an impressive accomplishment for a junior scholar doing interdisciplinary work in a highly technical field like finance, or for that matter, anybody else. Congratulations Kate!

The governor of North Dakota recently signed into law the North Dakota Publicly Traded Corporation Act (ht: Broc Romanek). The Act resembles a shareholder activist wish list including majority voting for the election of directors, elimination of staggered boards, advisory shareholder votes on executive compensation, shareholder proxy access, proxy contest reimbursement, poison pill restrictions, etc.

While the Act is certainly groundbreaking, my view is that it was enacted as a publicity stunt. The practical effect of it is likely to be zilch. The Act only applies to public companies incorporated in North Dakota that affirmatively opt-in through provisions in their articles of incorporation. Hence, shareholders cannot unilaterally opt-in a company since an articles amendment requires board and shareholder approval. Additionally, a grand total of two public companies are incorporated in North Dakota (Dakota Growers Pasta and Integrity Mutual Funds of Minot), and there is no reason to suspect that they will opt-in.

Even if a corporation wanted to grant shareholders the rights provided for in the Act, it seems highly unlikely it would do so by reincorporating in North Dakota and opting-in. Instead, it could simply tailor its governing documents to strike what it believes to be the appropriate balance between board and shareholder power for its particular business and continue to enjoy the benefits of Delaware incorporation (business savvy judiciary, responsive legislature, etc.).

Of course, the genius of American corporate law may ultimately prove me wrong, but I doubt it.

Professor Sokol points to this paper by Ittai Paldor (an SJD student at U. Toronto) which Sokol points out qualifies as the rarely observed defense of the per se rule against RPM. Here’s an excerpt from the abstract:

In the following I argue that legal policymakers’ current approach is economically justified. I show that all pro-competitive explanations for RPM suffer from a common flaw, the possibility of non-price competition, which challenges RPM’s ability to achieve any of the pro-competitive goals attributed to it. I then proceed to show that non-price vertical restraints are capable of achieving the pro-competitive goals which RPM is incapable of achieving. This justifies both applying a per se illegality rule to RPM and applying a different rule, namely a rule of reason, to other vertical restraints.

Dr. Miles, RPM, the pending Leegin decision, and the economics of vertical restraints are topics that we have blogged about quite a bit here (see here for a collection of these posts). In fact, Thom wrote a very persuasive response to Commissioner Harbour’s “Open Letter” to the Supreme Court which cites to Paldor’s article. Readers of this blog know my views on the economics of RPM and my belief that the per se rule is not appropriate for any vertical restraints.  So without saying much more about them here, it should not be difficult to figure out that I think Paldor misunderstands the economics of vertical restraints — and more specifically, the promotional services rationale for RPM.

However, I want to make a simpler point here. Paldor’s argument is not even capable of justifying the per se approach to RPM even if his claims about the pro-competitive explanations were true. Let’s assume arguendo that the author had successfully shown that the existing pro-competitive rationales for RPM were invalid (he has not, but that is besides the point).  It would not follow from such a showing, as the author asserts, that “this justifies both applying a per se illegality rule to RPM and applying a different rule, namely a rule of reason, to other vertical restraints.”   The default rule in antitrust analysis, the one applied when we know nothing or little about a practice, is the rule of reason.   This principle is settled and well known.

The real burden is for those advocating the use of the per se prohibition to demonstrate that RPM always or almost always tends to produce anticompetitive effects.  A claim that we dont know much about the practice just doesn’t cut it in terms of justifying use of the per se rule on the Court’s own terms.  There is plenty of disagreement on the relative importance of various pro-competitive explanations (discount free-riding, inducing promotional services without such free-riding, dealing with demand uncertainty … ) and the cartel explanations.  But I don’t know of a single economist familiar with the RPM literature that has taken the view that RPM satisfies the “always or almost always” anticompetitive standard — and for good reason.  The focus of the per se advocates must turn away from the evidence.  As we’ve discussed here previously, there is a good amount of empirical evidence that supports the view that RPM is generally output-increasing and very little to support the view that RPM is frequently (much less always or almost always) used to facilitate a dealer or manufacturer cartel. Frankly, it is a bit surprising to see support for the per se rule given the high standard for use of these rules in the United States coupled with the strength of the evidence here.

The bottom line: Consumers will be better off when Dr. Miles is overturned.

As David points out over at Antitrust Review, the FTC has redesigned its website.  It is much easier to use than the old version and includes much easier access to content.  Here is the link to the Sections 2 Hearings and another to a weekly calendar of FTC Commission Meetings, Speeches, Workshops, Testimony and other events.

Of course, the big event on the antitrust community radar for next week is the ABA Antitrust Law Spring Meetings (here is the brochure).  See you there.

Last month, at Tulane’s Corporate Law Institute, Delaware Vice Chancellor Leo Strine suggested that it might not be prudent for directors to consult “Mickey Mouse” investment banks when assessing a going private (or other) deal.  Normally I am a huge Strine fan.  But I think he missed the bus on this one. 

Let me first stipulate that I understood Strine’s Mickey Mouse comment to mean that boards of directors or special committees should not struggle to find a truly independent investment bank (e.g. one who has never done work for the company) to advise them when assessing proposed going private transactions.  Better to pick one of the big regular players: 

Goldman Sachs = Credible Bank; Nowicki & Damodoran = Mickey Mouse Bank

But Vice Chancellor Strine appears not to acknowledge that understanding how to value corporations and deals is not something on which Goldman et al. have a monopoly.  A small and/or no-name Mickey Mouse investment bank can certainly compete in terms of quality of advice given.  Perhaps it would be helpful to analogize:  Wachtell, Lipton, Rosen & Katz.  They started as a small shop, with no-name lawyers, all of whom graduated from NYU.  They are now one of the top three deal law firms.  It seems to me that clients who hired them in their Mickey Mouse law firm days were prescient, not ill-advised.

Going further, I recall that Vice Chancellor Strine said he favored investment banking repeat players because they were not starting from scratch – they knew the issuers, they had done work for the issuers.  He intimated that the Mickey Mouse bank would not be able to give the same good advice the regular players could give because the Mickey Mouse bank would not have the history and familiarity with the target corporation that the regular player had.  To that, I say, most respectfully, hogwash.

I am not a Goldman Sachs i-banker, but I can do a valuation.  With the right tools, I could make a fancy board book, and I could give a power point presentation on how to value a business.  Naysayers might respond with a scoff, saying that I lack “the insight” the big players have to do a really good valuation of any given business.  My response would be that there is nothing proprietary about insight.  If there is something special about the issuer that makes it more or less valuable than the comparables or the DCF or whatever would indicate, that can be revealed by talking to the CFO (or by talking to the special committee itself).  (I was going to suggest “by reading the public disclosure,” but I did not want the cynics to snort.)

I suppose Vice Chancellor Strine might reply that valuation is more an art than a science.  My response to that, however, is that this art is often expressed in favor of the regular client.  Phrased differently, the regular players do have more of a foundation from which to start an analysis of a proposed deal, but they *also* have more of a reason to reach a given decision on the deal in one direction or another.  They have more of a reason to be biased.  So I think things are a wash in that regard.

Mind you, I am not suggesting that hiring me to prepare a board book is a good option, but I am suggesting that there is likely a flood of Mickey Mouse investment banks out there staffed with super bankers who can certainly can do a quality job advising a board or a special committee on a deal.  With fewer conflicts than the big players.

See here.