If legislators disagree about the efficacy of a proposed policy, why not resolve the disagreement with a bet?  One approach would be to impose one policy approach randomly on some members of the population, but not on others, to determine whether the policy meets its goals. This solution would overcome the measurement problems of conventional regression analysis and would provide a useful way to compare regulations and promote bipartisan agreement. Legislators might agree that once such a test is complete, the winning approach would apply to everyone.

For example, regulators could test the Sarbanes-Oxley Act’s most controversial provisions, such as those requiring public companies to institute internal controls and then to have their CEOs and CFOs certify their financial statements, by randomly repealing one or more of those provisions for some corporations for some period of time. Randomization would enable analysts to determine which regulatory regime is optimal by assessing which test-group of corporations has the highest level of success, whether measured by stock price, investor confidence in financial reporting, lack of fraud, or other yardsticks.

Conventional statistical and econometric analytical techniques are often used to measure the efficacy of statutes and regulations, but they face problems that randomized trials would not. Researchers may purposefully or mistakenly omit variables from their regression analyses, leading to incorrect results. Publishers are more likely to feature work that provides statistically significant results, even if those results are not correct, a phenomenon known as publication bias.

No doubt many economists and empiricists are nodding their heads in agreement and drooling at the opportunity to more accurately identify and measure the effects of regulation.  Randomization would allow application of techniques far superior to what is typically used.  AAY discuss some of the common critiques of randomization in the blog post, and at greater length in the paper.  The longer version is worth reading, but here is the short version from the blog post:

Ethical concerns are important, but may not present a significant barrier to using randomized tests. While legal randomized tests would lack the informed consent provided in medical experiments, the government regularly imposes regulations on the public – within constitutional and other legal bounds. Also, randomization sometimes makes the imposition more equal than regulation imposed using predetermined criteria. We tend to think it is worse to impose rules on people because the selected people are unpopular rather than simply because they were selected randomly.

How should randomized trials work? The experiments should be large enough to produce meaningful results. The test groups, meanwhile, should be the smallest possible without changing the results outside those test groups. For example, driving speed limits cannot be randomized at the individual level because such a test group size would significantly increase the risk of accidents. However, the test group could be at the county level.

Experiments should also be of sufficiently long durations to prevent test subjects from changing their behavior temporarily for the duration of the experiment. For example, if different income tax levels are imposed on different people to see if imposing a higher income tax reduces work output, an experiment of short duration would be more likely to be biased. Workers could wait out a temporary increase in income tax level by temporarily working less, and plan to work more once their income tax level decreases.

There is no problem, under current standards of judicial review, with administrative agencies testing out different regulations on their own. Agencies could put their proposed experimental regulations through the regular notice and comment process. After running the experiment, the agencies could provide a randomization impact statement explaining why the agency decided to test regulations through that process, describing the experiment, and providing its results. Because randomization provides for more objective analysis of policy results, courts should be more deferential in conducting hard look review to agencies that have selected policies through this approach.

The article shows that time-consistent, imperfectly targeted support to distressed institutions makes private leverage choices strategic complements. When everyone engages in maturity mismatch, authorities have little choice but intervening, creating both current and deferred (sowing the seeds of the next crisis) social costs. In turn, it is profitable to adopt a risky balance sheet. These insights have important consequences, from banks choosing to correlate their risk exposures to the need for macro-prudential supervision.

In the context of U.S. antitrust law, many commentators have recently called for an expansion of the Federal Trade Commission’s adjudicatory decision-making authority pursuant to Section 5 of the FTC Act, increased rulemaking, and carving out exceptions for the agency from increased burdens of production facing private plaintiffs. These claims are often expressly grounded in the assertion that expert agencies generate higher quality decisions than federal district court judges. We call this assertion the expertise hypothesis and attempt to test it. The relevant question is whether the expert inputs available to generalist federal district court judges translate to higher quality outputs and better performance than the Commission produces in its role as an adjudicatory decision-maker. While many appear to assume agencies have courts beat on this margin, to our knowledge, this oft-cited reason to increase the discretion of agencies and the deference afforded them by reviewing courts is void of empirical support. Contrary to the expertise hypothesis, we find evidence suggesting the Commission does not perform as well as generalist judges in its adjudicatory antitrust decision-making role. Furthermore, while the available evidence is more limited, there is no clear evidence the Commission adds significant incremental value to the ALJ decisions it reviews. In light of these findings, we conclude there is little empirical basis for the various proposals to expand agency authority and deference to agency decisions. More generally, our results highlight the need for research on the relationship between institutional design and agency expertise in the antitrust context.

We are in the progress of expanding the analysis and, as always, comments welcome here or at my email address on the sidebar.

The study highlighted some unusual trends.  Philadelphia case dockets are disproportionately larger relative to both its population and other state and federal courts.  Philadelphia plaintiffs are also relatively more likely to prefer jury trials and less likely to settle than other non-Philadelphia Pennsylvania plaintiffs.  The data appear to support the conclusion that Philadelphia courts demonstrate a meaningful preference for plaintiffs, by coaxing “business” from other courts and providing them with a unique combination of advantages; indeed, the PCLC’s own stated goals include a desire to “[take] business away from other courts.”   While these strategies have no doubt successfully increased litigation in Philadelphia, and benefit local Philadelphia attorneys, they also bring a substantial cost to Philadelphia businesses and consumers.

I’ve now conducted a preliminary supplemental analysis (available here) designed to test the proposition that the majority of plaintiffs in the PCLC are out-of-state without an apparent or substantive connection to either Philadelphia or even the State of Pennsylvania.  I considered a sample of about 1,400 of the mass-tort cases in the PCLC to determine if the plaintiff filing the case had a home address or had sustained the complained of injury either in Philadelphia or Pennsylvania. Although the findings are preliminary, the results indicate that a substantial fraction of plaintiffs with cases pending at the PCLC have no discernible or relevant connection to Philadelphia or Pennsylvania. This supplement to the original study provides strong evidence that the PCLC has succeeded in attracting a large number of out-of-state cases that comprise a substantial portion of the civil cases in Philadelphia.

The main conclusions of this supplemental analysis are as follows:

• Of the 1,357 cases in the sample, 913 (67.2%) were brought by plaintiffs who live out-of-state without any apparent connection to Pennsylvania or Philadelphia.
• Only 180 cases (13.3%) reveal plaintiffs who live in or allege injury in Philadelphia.
• The most substantial case types where the plaintiffs were overwhelmingly out-of-state are hormone therapy, denture adhesive cream, and Paxil birth defect cases.
• Although most or all of the companies involved in these cases do business in Philadelphia and a few have some sort of administrative offices there, the vast majority of defendants do not have their principal place of business in Philadelphia or even in Pennsylvania. It is unlikely that venue was moved to the PCLC in most or any of the cases.

A chart summarizing the results is available here at Table 1.

Joshua Wright, professor of law at George Mason University School of Law, took the position that there is no significant evidence that Google is guilty of antitrust violations. Even if Google, like other search engines, favors its own content when producing the results of a search request, he argued, dissatisfied customers can easily switch search engines. In other words, the competition is just a click away.

On the other side of the debate was Charles F. Rule, head of the antitrust practice at Cadwalader, Wickersham & Taft LLP. Rule, who has defended Microsoft in antitrust litigation, argued that ample anecdotal evidence exists that implicates Google in a mix of practices that have had the cumulative effect of excluding competitors’ content from appearing in a Google search, as well as monopolizing advertisers. He stressed that his opinions were his own.

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Wright discussed the evolution of search engines in the last ten years. He conceded that the allegation of search bias, in which a search engine favors its own content at the expense of rivals, is a possible violation of Section 2 of the Sherman Antitrust Act. But Wright noted that leading case law indicates that the behavior in question must harm the competitive process and thereby harm consumers, to be dubbed “exclusionary.”

“We demand evidence of real harm to competition before we break out the antitrust hammer,” he said, “and I don’t think there’s significant evidence of that here. It’s not hard to switch to get what you are looking for.”

Rule dismissed the “just-a-click-away” argument at the beginning of his talk.

“It’s not quite that simple,” he said. “The fact is that because of some of Google’s practices, the company has made it difficult for other search engines like Bing to achieve the same level of performance.”

Rule explained that search engines make their money by selling eyeballs to advertisers, and cited statistics that establish Google’s long-time share of the search-engine advertising market at 90 percent and up. He offered detailed descriptions of specific Google practices that have had the alleged effect of excluding competitive search engines—not just by blocking their content, but also by denying them opportunities to reach advertisers.

“With respect to bias, you can see specific anecdotes where it appears that Google has allegedly blacklisted certain companies intentionally and, in a very focused way, degraded their results so they appear lower on the page,” he said. “But also on the advertising side, there are anecdotes that when Google perceived a potential competitive threat, it automatically dramatically increases the price competitors have to pay, sometimes five to ten thousand percent overnight.”

The upcoming IPO of Facebook, the flak surrounding Twitter’s decision to censor some tweets, and Google’s weaker-than-expected 4th-quarter earnings all point to one of the big events of our times: The crazy, chaotic, idealistic days of the Internet are ending. Once, the Prairies were open and shared by everyone. Then the farmers arrived and fenced them in. The same is happening to the Internet: Apple, Amazon and Facebook are putting up fences — and Google is increasingly being left outside.

The old Internet on which Google has thrived is still there, of course, but like the wilderness it is shrinking. Often these days, we sign up for Facebook or Amazon’s private version of the Internet. At other times, we use a smartphone and download an App instead of using Google search.

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The danger to Google, in other words, is that as social networking, smartphones and tablets increasingly come to dominate the Internet, Google’s chance to earn advertising revenues from searching will shrink along with its influence.

Yes, Google has the Android and Google+, but these may not be enough to fight the shift to the closed Internet. Google+, of course, has just a tiny fraction of Facebook’s scale and there’s currently little reason to think it can catch up. The Android operating system, also an attempt by Google to build its own internet eco-system, is a more conspicuous success. Most commentators focus on the rapid growth of Android and the fact that it has greater market share than the iPhone.

But this analysis misses the point: The Android may have market share, but more than half of mobile searches come from iPhone users. Google may have developed Android but, unlike Apple’s iPhone, it does not really control it. Licensees like Samsung and HTC are able to adapt Android software to their own ends. And smart companies like Amazon are getting a free ride on Android while sharing little of the spoils with Google.

Don’t get me wrong: Google is still a force, just as Microsoft, Intel and IBM are. But they are no longer at the epicentre of the zeitgeist. Like Microsoft before it, Google can fight the good fight on many different fronts. Whether it can ever find an engine of growth capable of supplanting its core business is another question.

Check out the whole thing.

The Federal Trade Commission will host a workshop on April 26, 2012, to examine the use of mobile payments in the marketplace and how this emerging technology impacts consumers. This event will bring together consumer advocates, industry representatives, government regulators, technologists, and academics to examine a wide range of issues, including the technology and business models used in mobile payments, the consumer protection issues raised, and the experiences of other nations where mobile payments are more common. The workshop will be free and open to the public.

Topics may include:

• What different technologies are used to make mobile payments and how are the technologies funded (e.g., credit card, debit card, phone bill, prepaid card, gift card, etc.)?
• Which technologies are being used currently in the United States, and which are likely to be used in the future?
• What are the risks of financial losses related to mobile payments as compared to other forms of payment? What recourse do consumers have if they receive fraudulent, unauthorized, and inaccurate charges? Do consumers understand these risks? Do consumers receive disclosures about these risks and any legal protections they might have?
• When a consumer uses a mobile payment service, what information is collected, by whom, and for what purpose? Are these data collection practices disclosed to consumers? Is the data protected?
• How have mobile payment technologies been implemented in other countries, and with what success? What, if any, consumer protection issues have they faced, and how have they dealt with them?
• What steps should government and industry members take to protect consumers who use mobile payment services?

To aid in preparation for the workshop, FTC staff welcomes comments from the public, including original research, surveys and academic papers. Electronic comments can be made at https://ftcpublic.commentworks.com/ftc/mobilepayments. Paper comments should be mailed or delivered to: 600 Pennsylvania Avenue N.W., Room H-113 (Annex B), Washington, DC 20580.

The workshop is free and open to the public; it will be held at the FTC’s Satellite Building Conference Center, 601 New Jersey Avenue, N.W., Washington, D.C.

The Law & Economics of Organization: New Challenges and Directions

Nov. 30-Dec. 1, 2012

The Walter A. Haas School of Business, with support from the Alfred P. Sloan Foundation, is issuing a call for original research papers to be presented at the Conference on The Law & Economics of Organization: New Challenges and Directions. The conference will be held at the Haas School of Business in Berkeley, CA, on Friday, November 30, and Saturday, December 1, 2012. A reception and dinner will follow a keynote address by Nobel Laureate Oliver Williamson on Friday.

The purpose of the conference is to take stock of recent advances in the analysis of economic organization and institutions inspired by the work of 2009 Nobel Laureate Oliver Williamson and to examine its implications for contemporary problems of organization and regulation. Empirical research and research informed by detailed industry and institutional knowledge is especially welcome.

Relevant topics include but are not limited to

• the nature, role, and implications of bounded rationality and opportunism as they relate to issues of contracting and the institutional framework governing contractual relationships
• government intervention in the market through regulation, antitrust policies, and direct investment (e.g., energy market and health care regulation; patent enforcement; concession contracts in alternative legal environments; government tax preferences for and subsidization of technologies and markets)
• the operation and regulation of financial markets and institutions (e.g., the origins of and responses to the financial crisis; the role of credit rating agencies; financial and futures market organization and regulation)
• legal and economic determinants of corporate organization, from joint ventures to the organization of corporate boards (e.g, labor restrictions and corporate organization; organization of high technology companies; regulation of corporate boards)

Paper proposals or, if available, completed papers should be submitted on line at http://www.bus.umich.edu/Conferences/Haas-Sloan-LEO-Conference by March 31, 2012. The deadline for completed papers is November 1, 2012. Selections will be made by the conference organizers, Professors Pablo Spiller (Berkeley), Scott Masten (Michigan), and Alan Schwartz (Yale). Conference papers will be published in a special issue of the Journal of Law, Economics, & Organization.

You may have noticed last Wednesday’s blackout of Wikipedia or Google’s strange blindfolded-logo screen. These were attempts to kill the Protect IP Act and the Stop Online Piracy Act, proposed legislation intended to hinder piracy and counterfeiting. The laws now before Congress may not be perfect, and they can still be amended. But to do nothing and stay with the status quo is to keep our creative industries at risk by failing to enforce their property rights.

Critics of these proposed laws claim that they are unnecessary and will lead to frivolous claims, reduce innovation and stifle free speech. Those are gross exaggerations. The same critics have been making these claims about every previous attempt to rein in piracy, including the Digital Millennium Copyright Act that was called a draconian antipiracy measure at the time of its passage in 1998. As we all know, the DMCA did not kill the Internet, or even do any noticeable damage to freedom—or to pirates.

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Scads of Internet pundits and bloggers have vehemently argued that piracy is really a sales-promoting activity—because it gives people a free sample that might lead to a purchase—or that any piracy problems have been due to a failure of industry to embrace the Internet. Yet these claims are little more than wishful thinking. Some reflect a hostility to commercial activities—think Occupy Wall Street, or self-interest. Others make “freedom” claims on behalf of sites that profit by helping individuals find pirate sites, makers of complementary hardware, or companies that benefit from Internet usage and collect revenues whether the material being accessed was legally obtained or not.

In my examination of peer-reviewed studies, the great majority have results that conform to common sense: Piracy harms copyright owners. I was also somewhat surprised to discover that the typical finding of such academic studies was that the entire enormous decline that has occurred is due to piracy.

Contrary to an often-repeated myth, providing consumers with convenient downloads at reasonable prices, as iTunes did, does not appear to have ameliorated piracy at all. The sales decline after iTunes exploded on the scene was about the same as the decline before iTunes existed. Apparently it really is difficult to compete with free. Is that really such a surprise?

Do check out the whole thing.

According to the bill, a windfall tax of 50 percent would be applied when the sale of oil or gas leads to a profit of between 100 percent and 102 percent of a reasonable profit. The windfall tax would jump to 75 percent when the profit is between 102 and 105 percent of a reasonable profit, and above that, the windfall tax would be 100 percent. The bill also specifies that the oil-and-gas companies, as the seller, would have to pay this tax.

We have a long archives of posts here at TOTM on a variety of forms of price gouging legislation in oil and gas.   Most recently, in discussing a White House Task Force aimed to detect price gouging and usurping jurisdiction from the Federal Trade Commission, I wrote:

One need only read the FTC’s 222 page report on gasoline prices post-Katrina and Rita to appreciate the Commission’s expertise in this area.  But perhaps most importantly, and undoubtedly related to the appointment of a working group outside the Commission, is that the Commission understands the relevant economics.  Indeed, as I noted just recently, then Bureau of Economics Director Michael Salinger gets it right when he observed  “as unpleasant as high-priced gasoline is, running out will be even worse.”  Further, it was the Commission Report that found not only scant evidence of what might be described as “gouging” — but did find examples of gas stations that shut down rather than risk a suit under a state price gouging law.  “Price Gouging Helps Consumers” doesn’t make for much of an election slogan, so perhaps this is all to be expected.  But nobody should be fooled into believing that enforcement of existing state price gouging laws, or a new federal task force devoted investigate “price gouging,” are going to make consumers better off.

The criticisms against price gouging laws become even stronger against a “Reasonable Profits Board,” which is even more blatantly political, even more likely to harm consumers, and even more likely to waste social resources than enforcement of state price gouging laws.