Abstract

We assess the capacity of the U.S. property-liability insurance industry and the efficiency of the state guaranty fund system in response to large scale loss events to assess the resilience of the current system to the growing challenges of climate change. We identify characteristics of the industry’s capital structure and the guaranty fund system that limit the ability to indemnify policyholders following extreme catastrophic losses. We also consider the sustainability of the system over time under assumptions of increasing loss frequency and severity. We find that some attributes of insurance guarantees present short-term problems for policyholders and create long-term challenges for competitive private insurance markets, particularly when a subset of insurers shoulders the burden for past losses.

Among collectors, it is said that art is cheap; it is assurances that are expensive. What gets people to spend thousands on some dribbles on a canvas by a no-name is the promise — by a gallery owner or other “expert” — that the thousands will become millions.

The value of money is the same.

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Turf battles are nothing new in Washington, but the one currently raging over which federal agency has authority to regulate the trading of digital assets reveals deep dysfunction in the modern administrative state. The battle goes far beyond which agency gets more power; the future of the internet may be at stake.

Read the full piece here.

The Dodd-Frank Act’s so-called “Durbin amendment,” passed more than a decade ago in 2010, was supposed to reduce the cost of consumer goods by regulating the price and processing of debit-card transactions.

Read the full piece here.

Abstract

Policymakers, commentators, and academics have called for a Great Reset, a deepseated overhaul of the organization of the global economy. Some suggest that management theory needs a reset of its own. We argue that Great Reset proponents fail to appreciate the power of markets to bring about desirable social outcomes and are overly sanguine about what governments can do to alleviate alleged market failures. These views also drive the increasing enthusiasm for stakeholder governance, an increased government role in innovation, and the call for new metrics for assessing outcomes, all part of the Great Reset narrative. And yet, concentrating more decision power in the hands of governments, implementing diffuse metrics, and diluting effective ownership can hamper the functioning of markets, encourage crony capitalism, and reduce the resources that are available for dealing with grand challenges. Existing management theory provides powerful tools for understanding the benefits and costs of alternative institutional arrangements; abandoning these tools will push management theory to the sideline in policy debates.

Abstract

Academic investigators have used behavioural economics, a method developed originally to study consumers and their sentiments towards products, to study matters of public policy. A recent article in the European Journal of International Law – ‘What Is Wrong with Investment Arbitration? Evidence from a Set of Behavioural Experiments’ – gives a detailed summary of a series of experiments performed in order to study public sentiment towards investment arbitration. The investigators, Maria Laura Marceddu and Pietro Ortolani observe that public sentiment improves towards the outcome of a dispute settlement procedure when survey respondents are told that the procedure was a ‘court’ with tenured judges, and it worsens when they are told that it was ‘arbitration’ with temporary appointees. From their observations, Marceddu and Ortolani conclude that an international investment court, such as that which the European Union promotes, is a good idea. We suggest, however, that a further inquiry should investigate in greater detail public understanding of what qualities the individuals who serve as judges or arbitrators ought to display, as distinct from the institutional format in which dispute settlement takes place.

Abstract

Why do some legal disputes fail to settle?  From a bird’s eye view, the literature offers two categories of reasons.  One consists of arguments based on informational disparities.  The other consists of psychological arguments.  This paper explores the psychological theory.  It presents a model of litigation driven by risk preferences and examines the model’s implications for trials and settlements.  The model suggests a foundation in Prospect Theory for the Mutual Optimism model of litigation.  The model’s implications for plaintiff win rates, settlement patterns, and informational asymmetry with respect to the degree of risk aversion are examined.

Introduction

Imagine you are at the grocery-store checkout line and it is to pay. You enter your credit card in the terminal, assuming that your payment will be routed over the network operated by the brand on your card (typically Visa or Mastercard). But you learn after the fact that the grocery store has chosen instead to route it over China Union Pay.

Most of us would be uncomfortable ceding to the merchant the authority to route transactions over the cheapest network, without considering our concerns about security, reliability, and other card features (including rewards). Yet that is already the case for many point-of-sale transactions made with debit cards—the result of a 2011 regulation implemented by the Federal Reserve. Consumers can, however, often still force the transaction to run over their preferred network by pushing the “credit” button.

But new rules under consideration by the Federal Reserve would extend merchants’ ability to determine how debit transactions are routed to online transactions, while also making it more difficult for consumers to control who gets to handle their personal data and process their transactions.[1] Perhaps more worryingly, a new bill (the “Credit Card Competition Act”) introduced by Sen. Richard Durbin (D-Ill.) would, in the name of “competition,” impose similar routing requirements on credit cards, while ignoring important differences in the competitive framework of debit and credit cards.[2]

Since they emerged more than 50 years ago, payment-card networks have come to play an increasingly important role in our lives, both directly and indirectly. Directly, they facilitate hundreds of billions of transactions every year, representing tens of trillions of dollars in value.[3] Indirectly, they have contributed to a near-complete shift from paper-based to electronic value exchange and accounting in the United States and many other countries. This has, in turn, resulted in enormous efficiency improvements and wider social benefits, such as the development of online commerce, greater ease of travel, and reduced tax avoidance.[4]

The shift from paper to electronic value exchange has been driven almost entirely by voluntary decisions made by businesses and consumers. Despite such clear evidence of market success, over the past three decades, governments have increasingly sought to correct alleged “market failures” in payment-card markets. The main tool governments have used is price controls on interchange-fee rates. More recently, however, several governments—including the United States, the European Union, and Australia—have sought to reduce rates further still by regulating the manner in which payments are “routed” (i.e., the way that messages pertaining to a transaction are sent between the merchant and the issuing bank). This has important implications for consumer protection, fraud prevention, and financial inclusion.

In previous studies, we have shown that regulation of interchange fees typically has slowed the shift to more innovative, quicker, more convenient payment systems, while also reducing other benefits and particularly harming poorer consumers and smaller merchants.^[5]

Prohibitions on exclusivity in routing have similar effects as direct price controls. But imposed routing requirements will have additional effects that go beyond those of price controls and would result in various harms to consumers and the economy. This study seeks to delve deeper into the problem, focusing primarily on the justifications for and effects of regulations that affect the way in which transactions are routed. While “routing” may seem arcane, it is fundamental to the effectiveness of payment networks. Understanding the likely consequences of such regulation is thus important. That is the purpose of this paper.

We begin, in Section II, by describing the technological and economic elements of payment-card routing. Supporters of forced routing requirements contend that they will promote more efficient competition in consumers’ payment-card usage. But we show that this superficial argument ignores the basic economic realities of payment-card networks, as well as the fundamentally different nature of consumer competitive choice, both in debit-card markets (where routing requirements currently exist) and in credit-card markets (the intended target of Sen. Durbin’s proposed law). Section III reviews the evidence regarding the effects of regulating payment networks. We summarize the pernicious effects of price controls and then explain how the routing mandate created by the 2011 Federal Reserve regulation, known as Regulation II, has had similar effects. Section IV considers the proposed changes to Regulation II and the new Durbin proposal to regulate credit-card routing, with a particular focus on the likely harmful effects of the changes on the incidence of fraud and the knock-on effects on issuers, cardholders, and merchants. Section V concludes.

[1] Debit Card Interchange Fees and Routing, FR 26189 (2021), available at: https://www.govinfo.gov/content/pkg/FR-2021-05-13/pdf/2021-10013.pdf.

[2] Credit Card Competition Act of 2022, S. 4674, 117th Cong. § 2 (2022), available at: https://www.congress.gov/117/bills/s4674/BILLS-117s4674is.pdf.

[3]  Global Network Card Results in 2021, Nilson Report Issue 1224, https://nilsonreport.com/mention/1672/1link.

[4] See the appendix to this paper and references therein.

[5] See Todd J. Zywicki, The Economics of Payment Card Interchange Fees and the Limits of Regulation, ICLE Financial Regulatory Program White Paper Series (Jun. 2, 2010), available at http://laweconcenter.org/images/articles/zywicki_interchange.pdf; Todd J. Zywicki, Geoffrey A. Manne, and Julian Morris, Unreasonable and Disproportionate: How the Durbin Amendment Harms Poorer Americans and Small Businesses, International Center for Law and Economics (Apr. 25, 2017); Todd J. Zywicki, Geoffrey A. Manne, and Julian Morris, Price Controls on Payment Card Interchange Fees: The U.S. Experience, George Mason Law & Economics Research Paper No. 14-18, (Jun. 6, 2014).

Abstract

Cy près is a pivotal doctrine in estate law and indeed American jurisprudence. It places courts in the shoes of settlors of charitable trusts to discern not only their original intent but also affords the possibility of continuing the material purpose for which settlors created enduring legacies of philanthropy benefitting society. For this reason, it may well be that no other legal doctrine is as closely tied to the interests of the individual and the collective as cy près. And my first-of-its kind study puts the cy-près doctrine front and center, while providing three major contributions to the field.

First, through deliberative historical analysis, I offer an in-depth look at the types of cases American courts have heard involving the use of cy près. This historical categorization and explication is itself unique and provides significant insight into the controversies that allowed the doctrine to evolve. Second, the application of empirical methods to examine the doctrine is groundbreaking. By holistically examining the data I collected, I have been able to discern three major themes. The passage of time yields a gradual but greater adoption of the use of the cy-près doctrine. The presence of reversionary, gift-over, or private interests renders the use of the cy-près doctrine less practicable. And finally, courts are overwhelmingly more likely to apply cy près in cases involving public charitable trusts, educational purpose trusts, and medical purpose trusts, even when controlling for other independent variables and typologies of charitable trusts. Last, fifty-state surveys are commonplace; yet, none exists for the doctrine of cy près. I was able to assemble such a survey that not only assisted me in conducting this research but will undoubtedly aid other researchers for years to come, which I have addended to this Article in the Appendix.