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Archive for March, 2007

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Shareholder Proposal re: NO NEW stock options

Posted by Bill Sjostrom on March 19, 2007

DealBook reports that Goldman Sachs has included the following shareholder proposal from Evelyn Davis in its 2007 proxy statement:

RESOLVED: “That the Board of Directors take the necessary steps so that NO future NEW stock options are awarded to ANYONE, nor that any current stock options are repriced or renewed (unless there was a contract to do so on some).”

REASONS: “Stock option awards have gone out of hand in recent years, and some analysts MIGHT inflate earnings estimates, because earnings affect stock prices and stock options.”

There are other ways to “reward” executives and other employees, including giving them actual STOCK instead of options.

Recent scandals involving CERTAIN financial institutions have pointed out how analysts CAN manipulate earnings estimates and stock prices.

I did a Westlaw search to see whether Goldman filed a no-action request with the SEC to exclude the proposal. It appears that it did not. However, Ms. Davis submitted the same proposal to Pfizer. Pfizer did file a no-action request arguing that the proposal is excludable under Rule 14a-8(i)(7) because it “pertains to matters of Pfizer’s ordinary business operations, namely general compensation matters.” The SEC concurred.

Posted in corporate governance, securities regulation | 3 Comments »

Helpful Law Review Articles?

Posted by Elizabeth Nowicki on March 19, 2007

Adam Liptak, in the NYT, penned an interesting article on the declining level of usefulness that law review articles appear to have in judicial opinions.  (Orrin Kerr has a nice post on the article.)

Various quotes in the article make clear that some members of the judiciary do not find law review articles particularly helpful in deciding cases.  I would like to think that that is more reflective of the substance of many of the well-placed law review articles than it is of the value of law review articles as a genre.

I say this as an academic who favors doctrinal work and who has gone so far as to say somewhere in one of my articles on securities fraud that the whole point of writing the article was to help the court and the bar make their way through securities fraud claims.  I have taken a bit of flack from a few scholars who look down on doctrinal work, yet my sense has always been, and the quotes from the judiciary in the NYT article seem to confirm, that doctrinal work has the potential to be incredibly valuable in the courts.Â

For example, my writing on telecomm and on securities fraud – all of which is doctrinal – has been cited by courts.  I would like to flatter myself by thinking that the recent Mass. district court judge who cited my securities fraud work in passing (see In re Credit Suisse-AOL Secs. Litig., 465 F. Supp.2d 34 (D.Ct. Ma. 2006)) actually read my work for its substance (which led to the analyst liability claims *not* being dismissed).  I would like to believe that I am achieving my goal of explaining a more sensible way to examine securities fraud claims in the context of one-off actors (e.g. investment banks, auditors, lawyers), and I would like to think that, if academics produce articles that are helpful (as opposed to purely descriptive, etc.), they will be relied upon as such.

The ball, then, seems to partially rest with the second- and third-year law students who select the articles that their law journals will publish.  What is the chance that the student editors of the “top” law reviews are going to read the NYT article and start looking for good academic work that has practical value to the bench, bar, and/or legislature?  When choosing between articles titled “Going Private Transactions and Fiduciary Duties” and “A Countermajoritarian Analysis of the Ellsworth Court, Federalism and the Eleventh Amendment,” perhaps law review editors might consider the potential practical value of the articles in molding the evolution of the law.  (I am not suggesting that an article providing a countermajoritarian analysis of the Ellsworth court and the 11th Amendment would not help mold the law, by the way.)

Thanks to my colleague Mark Drumbl for bringing this NYT article to my attention.

Posted in Uncategorized | 2 Comments »

Midwest Farmers 1, Environment 0, Poor People -1

Posted by Thom Lambert on March 18, 2007

Friday’s WSJ documented an effect of ethanol mandates:

Rising costs for agricultural commodities are making their way up the food chain into the food you eat. Thanks to rising demand for corn-based ethanol, corn prices have nearly doubled during the past year. That’s raised costs for corn products, like the ubiquitous high-fructose corn syrup that’s used to flavor everything from Apple Jacks to Yoplait Yogurt. It’s also raised costs for livestock and poultry, which are fed corn, and for crops like soybeans, which farmers are replacing so they can grow more corn.

Yesterday, the Labor Department reported February prices for “crude foodstuffs and feedstuffs” were 18.8% above year-ago levels. Food companies are starting to pass those higher costs on — wholesale consumer food prices were 6.8% above year-ago levels. Today’s report on consumer inflation will probably show higher prices at the checkout line, too.

These higher prices might not be a bad thing if we were getting some environmental benefit from increase ethanol use. But as Jerry Taylor and Peter Van Doren have shown, we’re not.

Farmers, of course, are benefitting. And we Americans like farmers — so much so that we throw subsidies their way despite the fact that U.S. farm households earn about 11 percent more on average than non-farm households. Unfortunately, the subsidy inherent in ethanol mandates disproportionately impacts the poor, who spend a larger percentage of their incomes on food. Doesn’t that seem like a perverse sort of redistribution?

Unfortunately, the situation is likely to persist. Midwestern farmers constitute the sort of discrete and insular group that organizes well to curry legislative favors. Food consumers, by contrast, are pretty widely dispersed and difficult to organize. And since the costs of ethanol mandates (increased food prices) are diffuse while the benefits (increased profits for farmers) are concentrated, farmers will be much more likely to lobby for their preferred outcome.

I say we require ethanol to stand on its own two feet, and if it can’t, let it fail.

Posted in environment, markets, politics, regulation | 2 Comments »

Insider Trading: Sin or Crime? (or None of the Above?)

Posted by Thom Lambert on March 15, 2007

R. Foster Winans knows insider trading.

A former author of the Wall Street Journal‘s Heard on the Street column, Winans was a key figure in an insider trading case that went all the way to the U.S. Supreme Court. In that case, Carpenter v. United States, the Court affirmed securities fraud and mail/wire fraud convictions against Winans, who tipped investors about the contents of forthcoming Heard on the Street columns.

In an interesting NYT op-ed, Winans argues for a rethinking of insider trading policy. He contends that the SEC’s current policy improperly aims at “maintain[ing] fairness” in securities markets. Trading on an informational advantage may be a sin, Winans says, but it really isn’t a crime. Indeed, everyone who trades stock does so because she believes she knows something others don’t — something that causes the stock she’s trading to be undervalued (if she’s purchasing) or overvalued (if she’s selling). Moreover, the only way the SEC can police unfair trading on the basis of an informational advantage is to prosecute selectively, “much as a patrolman tickets only the red sports car when everyone on the road is speeding.” That sort of selective prosecution is troubling, Winans maintains, for “stopping the sports car slows traffic only for a mile or two” and “gives the false impression that the policeman is on the beat, making the financial markets safe for the rest of us.”

Winans thus concludes that the SEC ought to stop fighting sin — i.e., trading on an informational advantage — and redirect its efforts to combatting crime — i.e., insider trading that involves the theft of non-public information. (“The solution is sinfully simple. Throw out the current insider trading laws and bus the Securities and Exchange Commission’s lawyers over to the Justice Department, where they can concentrate on the real crime: stealing.”)

While I’m generally sympathetic, I think Winans glosses over a couple of things.

First, current insider trading policy is not — at least, isn’t officially — based on the achievement of fairness (or a level playing field) in securities trading. It couldn’t be. As Winans notes, practically all trades involve some sort of information asymmetry. Moreover, making it illegal to trade on the basis of an informational advantage would wreak havoc on the securities industry, in which analysts make their livings — and enhance market efficiency — by discovering hidden information and recommending trades on the basis of it. Efficient capital markets are ultimately the best investor protection there is, so any development that impaired securities analysts would ultimately harm investors.

Fortunately, the Supreme Court grasps this point. The Second Circuit flirted with a level playing field-based insider trading regime in the 1969 Texas Gulf Sulphur case (“The core of Rule 10b-5 is the implementation of the Congressional purpose that all investors should have equal access to the rewards of participation in securities transactions. … The insiders here were not trading on an equal footing with the outside investors.”). The Supreme Court, however, squarely rejected the notion that insider trading liability can arise solely because of the unfairness of trading on an informational advantage:

Imposing a duty to disclose or abstain solely because a person knowingly receives material nonpublic information from an insider and trades on it could have an inhibiting influence on the role of market analysts, which the SEC itself recognizes is necessary to the preservation of a healthy market. (Dirks v. SEC, 1983)

Now, Winans may be right that the SEC’s real goal in prosecuting insider trading is to create some sort of level playing field. As a matter of legal doctrine, though, the insider trading ban is not based on ensuring informational parity. In other words, “sinful” trading on an informational advantage is not, without more, illegal.

Second, Winans’ sin versus crime dichotomy is a false one, for it leaves out the actual theory on which the ban is based: fraud. As a matter of official doctrine, insider trading is illegal not because it’s unfair (the sin theory) or because it’s stealing (the crime theory) but because it involves a misrepresentation. Under the classical theory, fraud arises because the trader is a fiduciary of her trading partner, owes that partner a duty to disclose the inside information before trading on it, and fails to do so. Under the misappropriation theory, fraud arises because the trader is in a relationship of trust or confidence with the source of her information and “feigns fidelity to the source of the information” by failing to disclose her trading plans before doing so. (See United States v. O’Hagan, 1997). While the misappropriation theory does seem to involve some sort of stealing (using information owned by a fiduciary), liability is based not on the using of the information but on the failure to disclose one’s intention to do so. As Justice Ginsburg explained in O’Hagan, “[F]ull disclosure forecloses liability under the misappropriation theory … [I]f the fiduciary discloses to the source that he plans to trade on the nonpublic information, there is no [insider trading liability].”

***

All that said, I’m sympathetic to Winans’ basic point that we should reconceive of insider trading as an offense based on theft, not fraud. The gravamen of an insider trading offense is trading on information that doesn’t belong to you, and the only reason the courts have concocted this crazy fraud-based liability scheme (which Saikrishna Prakash has aptly described as dysfunctional) is because the securities laws ban fraud and not theft of information. Congress could easily fix that and would likely do so if the courts would ever own up to the fact that they just can’t force this square peg of theft into the round hole of fraud.

Of course, if insider trading were treated as a property rights violation rather than as fraud, the door would be open for firms to opt out of the insider trading ban. A corporation might say to its insiders (or to some class of them), “We transfer our right to this information to you. You may use this information in making trades.” Would firms really do that? Who knows. We could let the market decide. Firms might find, as Henry Manne famously argued, that the right to trade on inside information is a desirable form of compensation — that their shareholders are better off if executives are compensated with the right to use information rather than with money that could otherwise go to the shareholders. Or they might find, as I’ve argued, that the right to trade on inside information enhances the efficiency of the firm’s stock price, preventing mispricing that can increase agency costs. Or they might find, as Henry more recently argued, that insider trading provides informational benefits that lead to better management.

It’s impossible to say ex ante what firms would do if we allowed them to allocate the right to trade on inside information. It’s likely, though, that some firms would figure out ways to reallocate property rights to enhance shareholder value. I say we take Winans’ advice, reconceive of insider trading as a property rights issue, and see what the market produces.

Posted in corporate law, insider trading, law and economics, markets, regulation, securities regulation | 5 Comments »

Is Certainty a Good Thing for Section 2 Standards?

Posted by Josh Wright on March 14, 2007

I was searching through the eCCP site for some interesting antitrust reading material, which it always carries in surplus, and came across this testimony from Joe Sims (here is his Jones Day bio) at the Section 2 hearings discussing the lack of certainty in monopolization cases:

This is generally a good thing, but it inevitably carries with it uncertainty of outcomes in particular cases. I noticed that the Microsoft representative in an earlier hearing took the common business position of urging that there be more clarity in the law. This is perhaps understandable given that company’s recent history, but it is a common business position – just tell me the rules and I will follow them. I have always thought that was a relatively short-sighted position by business. More clarity will not always (or even generally) mean better law, and in this area of law it will almost inevitably mean more restrictive rules than are justified by the facts, and probably long term adverse economic effects. It would make the advisory job easier, but probably is not in the long term public interest or in the long run interest of business generally. But unfortunately, in many areas businesses today are driven to concentrate on the short run, and don’t have much incentive to take the long view.

That is an interesting perspective and one that stands out from the chorus (of which I a member) advocating increased certainty and bright line rules in antitrust. However, I always thought the primary case for rules in antitrust was that fuzzy standards in antirtust invite greater Type II error. eCCP also has various other testimony, editorials, book reviews, and scholarly works in Competition Policy International. Go check them out.

Posted in antitrust, economics, federal trade commission, markets, regulation | 5 Comments »

Law School Rankings and Per Capita Downloads

Posted by Josh Wright on March 14, 2007

Brian Leiter has posted, with all the caveats that go along with using SSRN downloads to rank faculties, a new set of rankings using downloads for the past 12 months. Leiter lists the top 15 by total downloads and new papers in 2006 along with the share of total downloads attributable to the top 3 authors.  The first thoughts that crossed my mind when I saw these rankings were: (1) I like the use of the share measure which I found informative; (2) I wonder what would happen using per capita downloads; and (3) should we be using per capita downloads for these sorts of rankings?

So I started to write up a post about using per capita download rankings and THEN read this excellent post by Ted Soto on … “Per Capita Downloads” and scrapped mine.  Seto quickly strikes to the heart of the matter regarding controlling for faculty size:

It depends on what you’re trying to measure. Obviously, if what you want to measure is average productivity, you have to divide whatever productivity measure you’re using by the number of bodies. There’s no getting around it.

Not much to argue with there.  The appropriateness of controlling for faculty size surely depends on the function of the rankings.  But let’s pretend assume that these rankings are for the students.  At least partially.  What if the rankings are designed to help students figure out what schools have better faculties rather than who has more superstars (or which of them has made the greatest impact)?  There are plenty of avenues for figuring out who the superstars in any given field are.  My sense is that law school is not like graduate study in economics or other fields where graduate students may make their decision entirely based upon working with a particular mentor.  Prospective students wants to know who is productive, but they also want to know whether the faculty is on average, one that is having a scholarly impact.

My initial thought was that I would whip up some rankings using the per capita measures and see how they change.  Ted’s post has convinced me this isn’t a great idea (ok, I spent an hour doing it anyway but am not going to post it without making the corrections for faculty size) because of the measurement problems involved in counting faculty members. And indeed, the rankings are very sensitive to the number of faculty members in the denominator of these measures. To do this properly, one must account for clinical, emeriti, students, adjuncts, visitors, etc.  This is a pretty big problem.  As Seto writes:

Unfortunately, there is no appropriate standard measure of the size of a law school faculty. The ABA’s measure is the only standard measure of which I am aware, but it includes adjuncts, clinical faculty, and emeriti, at least on a fractional basis. In addition, few seem to know how to follow the ABA’s counting rules. As I have noted elsewhere (see Understanding the U.S. News Law School Rankings at 13), a majority of schools compute and report to U.S. News student/faculty ratios inconsistent with those computed by the ABA. For U.S. News purposes, law schools have an interest in overstating faculty size; some undoubtedly do so.

Instead, inspired by Leiter’s share measure and Seto’s post, I offer some thoughts on statistics I think would very useful to have if we assume that these rankings are at least in part produced for the consumption of prospective law school students:

  1. A Concentration Index Faculty Productivity. Leiter’s concentration measure gives us some information about the distribution of downloads. Specifically, the distribution attributable to the top 3 SSRN authors (note: Seto has another post with rankings removing the top 3 SSRN authors here). Readers with an antitrust background will be familiar with the use of concentration indices such as the C4 or C8 (the market share of the top 4 or 8 firms, respectively), which have now been replaced by the HHI (the Herfindahl-Hirschman Index). The HHI is calculated by squaring the market share of each firm competing in the market and then summing the resulting numbers. For example, for a market consisting of four firms with shares of thirty, thirty, twenty and twenty percent, the HHI is 2600 (302 + 302 + 202 + 202 = 2600). HHI’s therefore range from 0 (an infinite number of firms with shares approximating zero) to 10,000 (a true monopoly). Merger policy decisions are then (sometimes) based on the level and change in HHI that would be generated by a proposed merger. The conceptual idea of the HHI rather than the C4 or related measures is that the HHI tells us MORE about the distribution of output (in our case downloads) than adding up the shares of the the top 3, 4, or 8 firms (authors). I understand that the share of the top 3 SSRN authors does tell us something interesting and helps us to identify outliers. But if what we are after is a measure that tells us how much of the law schools productivity is concentrated in the work of a few authors, I think an HHI for law school faculties might be a very useful statistic.
  2. How Many Zeros? Seto’s post points out that it is really difficult to get the denominator right using per capita measures because faculty size data are an unreliable (and moving) target.  The measure above would be useful in telling students information about the concentration of downloads, but might students also want to know how many faculty members don’t have new papers in the last year, 2 years, 5 years?  What share of the faculty are “unproductive” in this sense?  I would imagine that students might want to know this information and that it might be more telling than looking at total download figures.

I think you might actually learn more about faculty productivity and impact by watching these measures over time than anything else.  But these are two I would like to see.  What else might students want to know about faculty productivity?   How about the faculty themselves?  And how would you measure it?

Posted in law school, legal scholarship, SSRN, universities | 4 Comments »

Klein v. Coase III: Fisher Body-General Motors Again (and Again)

Posted by Josh Wright on March 14, 2007

Peter Klein‘s post over at the always excellent Organizations and Markets reminded me that I have been wanting to blog about the most recent exchange between Ben Klein and Ronald Coase over the asset specificity, vertical integration, and the famous Fisher Body – General Motors example which has become a classic example of hold up in the literature. While this example from the original Klein, Crawford, and Alchian (1978) piece is almost 30 years old, and has been the subject of literally thousands of pages of debate and an entire JLE issue (April 2000), there is still some disagreement over the facts and what they tell us about the relationship between asset specificity and vertical integration.

In some ways, this newest part of the exchange is much ado about nothing in so far as it will not add much to our fundamental understanding of the theory of the firm. The holdup theory and the relationship between asset specificity and vertical integration is perhaps the most empirically tested economic propositions of modern industrial organization. On the other hand, there is probably something to learn from the most recent (and most heated in terms of tone) exchange in terms of both (1) what actually happened with the Fisher Body-General Motors relationship, and (2) the process of academic discourse in economics.

Recently, however, the debate (which had been dormant for awhile) got a tad bit uglier. Apparently, Klein had obtained a copy of the original 1919 Fisher Body-General Motors contract which had been previously unavailable and sent the contract and an early version draft of his new paper to Coase who responded with the publication of “The Conduct of Economics: The Example of Fisher Body and General Motors,” which is essentially an attack on Klein’s account and April 2000 JLE response. Coase essentially alleges that Klein made up the Fisher Body story to fit the theory but that a hold up “never happened” because Fisher Body did not actually mislocate plants or adopt an inefficient low-capital production technology which were the two mechanisms for holdup Klein had previously discussed (more on what actually did happen later). Coase goes on to criticize economists more generally for a failure to check facts and propensity to rely on theory alone.

Klein has now responded with “The Economic Lessons of Fisher Body-General Motors“, which has been posted on SSRN and is forthcoming in International Journal of Law and Business. Here is the abstract:

The costs of using rigid, inherently imperfect, long-term contracts to solve potential holdup problems, and the corresponding flexibility advantages of vertical integration, are illustrated by the Fisher Body-General Motors case. The holdup of General Motors by Fisher Body is shown to have involved Fisher renegotiating its body supply contract with G.M. so that, contrary to the original understanding, G.M. made half of the required investments in new body plants. Under the unchanged cost-plus contract terms designed to provide Fisher with a return on its equity capital investments, the decline in Fisher Body’s capital to sales ratio led to a substantial wealth transfer from G.M. to Fisher. G.M. was forced to accept this unfavorable contract adjustment because it desired co located body plants and was operating under a long-term exclusive dealing arrangement designed to protect Fisher Body’s original G.M.-specific capacity investments. The contract adjustment demonstrates the importance of distinguishing between inefficient threatened holdup behavior and the efficient way it is in both transactors’ interests to actually accomplish a holdup. Contrary to Ronald Coase’s recent criticism, this analysis reconciles all the available evidence.

Klein’s new analysis incorporates the previously unavailable 1919 contract to the existing Dupont case record which showed clear evidence (never disputed to my knowledge) of Fisher Body’s expressed refusal to locate plants adjacent to G.M. facilities and evidence of a dramatic increase in Fisher Body’s measured capital to sales ratio after 1922 and demonstrates that Fisher Body leveraged its bargaining position created by GM’s exclusive purchasing commitment to renegotiate a favorable contract adjustment in 1922 prior to agreeing to co-locate plants.

Klein’s analysis adds new evidence (the contract and 1922 contract adjustment) to the factual record and corrects the details of his previous account: it was not mis-locating plants but a threat to mis-locate plants combined with a reduction in capital to sales which resulted in a substantial increase in Fisher Body profits from 1922-26. As Klein writes:

Focusing on the 1922 contract adjustment as the way Fisher Body held up General Motors reconciles all the available evidence. Specifically, the fact that no plants were mislocated and that the contract required Fisher Body to use efficient production technology is fully consistent with Fisher Body’s initial refusal to locate body plants adjacent to GM assembly facilities, the reduction in Fisher Body’s actual measured capital to sales ratio and GM’s complaints about the extra costs it was bearing due to Fisher Body’s reduced capital intensity. Moreover, the contractual adjustment is consistent with the economic theory of holdup behavior, where transactors will attempt to hold up their transacting partner in the most efficient manner.

I will leave to readers to work through both the Coase and Klein articles on their own, but I thought I might share a few reflections on this exchange below the fold.

Read the rest of this entry »

Posted in contracts, economics, law and economics, legal scholarship, markets, scholarship | Comments Off

Why doesn’t majority voting as implemented have more teeth?

Posted by Bill Sjostrom on March 13, 2007

The whole idea behind majority voting for the election of directors, to paraphrase ISS, is that it transforms uncontested elections from symbolic to democratic. This is because majority voting in its purest form would give shareholders veto authority over management candidates—authority not afforded to shareholders under the traditional plurality voting standard.

Critics maintain that giving shareholders this power would be problematic. They argue such power has the potential to destabilize the board because it could result in the sudden removal of directors. This, in turn, could adversely impact a company’s ability to comply with listing standards or other requirements for retaining independent directors or directors with financial expertise, alter the consequences of having a staggered board, and changecontrol contest dynamics. Further, it could negatively impact the mix of skills and expertise possessed by the board. Critics also argue that majority voting would reduce the pool of qualified candidates willing to serve as directors because of the embarrassing possibility of a candidate failing to receive the requisite majority of votes to be elected even when running unopposed. Finally, they argue that majority voting is simply unnecessary because the traditional “withhold authority” option provides an adequate avenue for shareholders to express dissatisfaction with the board.

You would think that these objections are falling on deaf ears based on the number of companies that have adopted majority voting in the last few years (see here for statistics). In reality, however, to my knowledge not a single company has enacted a majority voting system that actually gives shareholders veto power over director candidates. So none of the critics’ concerns are actually implicated. While numerous companies have changed their voting standards from plurality to majority, because of the statutory holdover rule, an incumbent director nonetheless remains on the board even if the director fails to garner the requisite majority vote (and a board can ensure that all directors up for election are incumbents by having a resigning director step down and appointing a new director to fill the vacancy prior to the election). For an elaboration of these points, see my paper, Majority Voting for the Election of Directors.

A question I’ve been contemplating as of late is why the activist shareholders who have been largely responsible for the current majority vote movement appear satisfied with the results given there are ways to give majority voting more teeth. For example, the following bylaw amendment submitted by Professor Bebchuk at General Dynamics last year would actually give shareholders a form of veto power over director candidates: “In no event shall a director stand for election if that director was elected for an immediately preceding term in an uncontested election in which he or she received more ‘withheld’ votes than ‘for’ votes.” See Beth Young’s comment to this post for more ways.

My working hypothesis is that many activist shareholders are assessed by how successful they are in getting corporations to adopt reforms. If they pushed a real reform like the above bylaw amendment, chances are much greater that it won’t be adopted, and this wouldn’t be good for the resume. Or is it that they believe that toothless majority voting reflects the appropriate balance of power between a corporation’s board of directors and its shareholders (yeah, right)?

Posted in corporate governance | 1 Comment »

The Top 10 Antitrust Downloads

Posted by Josh Wright on March 11, 2007

Are posted over at Antitrust & Competition Policy Blog courtesy of Daniel Sokol.

Posted in antitrust, legal scholarship, scholarship, SSRN | Comments Off

Rubin on "Item Pricing Laws" in the WSJ

Posted by Josh Wright on March 10, 2007

Paul Rubin (Emory Law) has an excellent piece in the WSJ taking state regulators to task for “Item Pricing Laws” which require that most goods in retail stores have an individual price sticker rather than, for example, a price tag on the store shelf. IPLs increase “menu costs” when retailers want to change prices which chills sales and are likely to increase prices. Luckily, one doesnt have to wait for the evidence because Professor Rubin and his co-authors have it. Here is a description of their study:

In order to estimate the effect of the laws on actual prices, an area where one could compare similar stores subject to different laws is best — and the tri-state region of suburban New York, New Jersey and Connecticut is ideal. This region has similar socioeconomic characteristics, and markets are comparable in many respects. New York is an IPL state and New Jersey is not. In Connecticut, stores must either have item prices or use electronic shelf labeling systems, so that there are some stores subject to IPLs and some stores that are not.

The results? As expected, the IPL’s increase prices:

Prices in IPL stores are 20 cents to 25 cents higher per item than in non-IPL stores. Stores in Connecticut with electronic shelf labels were in the middle, with prices 15 cents lower than in IPL stores, and 10 cents higher than in non-IPL stores — because electronic shelf labels are more expensive than old fashioned labels but cheaper than item pricing. All results are highly statistically significant. The maximum estimate of the benefit of avoiding overcharges to consumers through IPLs is less that one cent per item. The costs exceed 20 cents per item. The laws are a bad deal for consumers.

How significant are these price differences — about a quarter per item? The average price of the items in our sample was about $2.50, so there is a 10% difference. This implies that prices of groceries are almost 10% higher in IPL stores. Food represents about 14% of the average family’s budget. IPLs, therefore, reduce the real incomes of families by more than 1% — a nontrivial amount.

As mentioned in the WSJ op-ed, the study is co-authored with Mark Bergen, Daniel Levy, Sourav Ray, and Benjamin Zeliger and is forthcoming in the JLE.  As earlier draft of the paper is available on SSRN here.

Posted in economics, law and economics, legal scholarship, markets, regulation, scholarship | 8 Comments »

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