Commissioner Rosch gets off his second shot in against the Department of Justice in just a few weeks in the pages of the Wall Street Journal — this time in a letter to the editor:

Obama’s Political ‘Price-Gouging’

If any doubts existed about whether the Justice Department is just “an arm of the administration,” they were dispelled by the attorney general’s announcement that he is forming, at the president’s request, a new “working group” to investigate “price gouging” at the gas pump (“White House’s Task Force to Probe Oil, Gas Markets,” U.S. News, April 22).  Oddly enough, this “working group” will come under the auspices of the Financial Fraud Enforcement Task Force, which was constituted to prevent fraud in the financial and lending markets. Not only would the group duplicate the functions of existing agencies—namely, the Federal Trade Commission, which through Congress-enacted legislation and its own market manipulationrule, is already empowered to investigate and prevent “price gouging,” and the Commodity Futures Trading Commission, with which the FTC has a memorandum of understanding to implement the rule—but it is blatantly political. It comes on the heels ofthe president’s April 4 announcement that he is running for re-election. By contrast, members of Congress in March sent a bipartisan letter to the FTC asking for a report on its efforts, under its Congress-mandated authority, to investigate “price-gouging” associated with the recent run-up in gas prices. When the FTC issued its “price-gouging” rule in August 2009, Commissioner William Kovacic warned that the rule could andwould be perverted to serve political ends. Lamentably, those of us who voted for it did not heed his warning.

J. Thomas Rosch

Commissioner

Federal Trade Commission

Washington

It was just a few weeks ago when Commissioner Rosch went on the offensive against the DOJ Antitrust Division, describing them as “an arm of the administration” which “can and will enforce the antitrust laws only insofar as that is consistent with administration policy.”  Rosch also took a shot at Assistant Attorney General Christine Varney.  The WSJ reports that Rosch described Varney as  “inclined to take a lenient view because of her prior job as a lawyer representing the American Hospital Association.”

While the shot against Varney’s “apparent conflicts” seems a bit out of line by my lights, Commissioner Rosch is right on point with respect to the politicization of oil prices and price gouging investigations.  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.

Filed under: antitrust, economics, markets, regulation

The Washington Post links to the transcript of the President’s recent remarks at a Palo Alto town hall meeting at Facebook’s headquarters on April 20.  The President talked about recent issues of interest, focusing primarily on the budget, unemployment and health care.  I did see one item that may be of interest to the antitrust community as the President discussed the link between immigration policy and job creation, especially in the high-tech sector:

So what we’ve said is let’s fix the whole system. First of all, let’s make the legal immigration system more fair than it is and more efficient than it is. And that includes by the way something I know that is of great concern here in Silicon Valley, if we’ve got smart people who want to come here and start businesses, and are Ph.D’s in math and science and computer science and — why don’t we want them to stay? Why would we want to send them someplace else?

Those are potential job creators. Those are job generators.  I think about somebody like an Andy Grove of Intel. You know, we want more Andy Groves here in the United States. We don’t want them starting companies. We don’t want them starting Intel in China or starting it in France. We want them starting it here.  So there’s a lot that we can do for making sure that high skilled immigrants who come here, study. We’ve paid for their college degrees. We’ve given them scholarships.  We’ve given them this training. Let’s make sure that if they want to reinvest and make their future here in America that they can.

TOTM readers may recall an item we posted last fall on a speech given by Paul Otellini of Intel which received some significant press coverage at least in part attributable to Otellini’s claim that “the next big thing will not be invented here.”  Otellini was highly critical that the regulatory environment in the United States was imposing a significant burden on economic growth.  Here is CNET’s description of his remarks (and here is the video):

Otellini’s remarks during dinner at the Technology Policy Institute’s Aspen Forum here amounted to a warning to the administration officials and assorted Capitol Hill aides in the audience: unless government policies are altered, he predicted, “the next big thing will not be invented here. Jobs will not be created here.”  Intel CEO Paul Otellini, who warned this week that the U.S. faces a huge tech decline.  The U.S. legal environment has become so hostile to business, Otellini said, that there is likely to be “an inevitable erosion and shift of wealth, much like we’re seeing today in Europe–this is the bitter truth.”  Not long ago, Otellini said, “our research centers were without peer. No country was more attractive for start-up capital…We seemed a generation ahead of the rest of the world in information technology. That simply is no longer the case.”

The role of immigration policy in attracting entrepreneurs is obviously very important.  But it is obviously not the only policy instrument available in this area; and there is an apparent tension in the immigration policy remarks and the concerns raised by Otellini, as well as the recent comments from antitrust regulators in the United States targeting high-tech firms, e.g. Intel, Google, Facebook, Apple, and others.  Overzealous competition policy enforcement in high-tech markets is one way to deter investment in these sectors, as well as innovation.  If we do want the next big thing to be invented here, giving competition policy a seat at the table when discussing “the whole system” makes a lot of sense.

Filed under: antitrust, economics, technology

Well, perhaps not quite the end of an era given all of the intense antitrust scrutiny that continues in the high-tech sector.  But it seems like it should not go without noting that the Microsoft case will officially come to an end on May 12th.  The San Francisco Chronicle observes:

In a final hearing in the case yesterday, Judge Kollar-Kotelly agreed to let the consent decree between Microsoft and the DoJ expire on May 12 as planned.

The judge had already extended the oversight twice — it was originally supposed to expire in 2007, but the judge pushed out the date a year because Microsoft didn’t move quickly enough to release useful documentation about how Windows PCs communicate with other software. In 2009, she extended the date for another two years.

• Europe. The EU has already fined Microsoft billions from a similar investigation that ended in 2004, and has since launched at least one more preliminary investigation into browser choice. Microsoft offered a “browser ballot” in Europe before the second investigation went too far, but competitors are watching for any hint of Microsoft’s old behavior and will run to the EU with a new complaint if they see it.

• Precedent. Although the final settlement between Microsoft and the U.S. government wasn’t that harmful, the case itself set an important precedent: Microsoft was found to have monopoly power in the market for personal computer operating systems. That means it’s still subject to a different standard of behavior than companies who have never been deemed monopolies.

Filed under: antitrust, technology

From the Attorney General’s Memorandum to the Financial Fraud Enforcement Task Force (HT: Michael Giberson, who is a must read on all issues oil and energy related:

Based upon our work and research to date, it is evident that there are regional differences in gasoline prices, as well as differences in the statutory and other legal tools at the government’s disposal. It is also clear that there are lawful reasons for increases in gas prices, given supply and demand.

See Giberson’s analysis of price gouging laws here.  Michael Salinger, former colleague at the Federal Trade Commission where he was Director of the Bureau of Economics, has one of my favorite lines on the relevant economics.  In writing about the FTC Report on price gouging after Hurricanes Katrina and Rita, Salinger wrote, “as unpleasant as high-priced gasoline is, running out will be even worse.”  Actually, the whole context is worth a read:

If the public were to ask my advice on the wisdom of price gouging legislation, however, I would counsel against it. When disasters like Katrina and Rita occur, prices must go up.

The difficulty is that without knowing the details of a disaster, it is impossible to specify in advance how much prices need to rise. As result, price-gouging legislation — particularly if penalties are severe and enforcement is aggressive — will pose two distinct risks. One is that prices will not rise to market-clearing levels and gas stations will run out of gasoline. As unpleasant as high-priced gasoline is, running out will be even worse.

The other is that gas stations will shut down rather than risk an allegation of price gouging. In the wake of major market disruptions, it is always going to be possible in hindsight to identify companies that raised the price the most and to label them as “gougers.” But gasoline stations do not set prices in hindsight. A vague definition of price gouging will make it difficult for gas station owners to know what price they can charge and stay within the law. Indeed, the FTC investigation uncovered examples of gas stations that shut down rather than risk a suit under a state price-gouging statute.

See also here.

Filed under: antitrust, economics, markets, regulation

Eric Clemons and Nehal Madhani have a posted a series of short blog posts on the Huffington Post focusing on Google, antitrust, and more specifically, vertical integration and search (Part I, Part II, and Part III).   The articles contain much of the standard hand-wringing about vertical integration and its impact on consumer welfare.  This is an issue I’ve written about here and here.  On its own, their analysis adds little new insight to understanding these issues from an antitrust perspective.  The series of posts are noteworthy, however, for two reasons.   The first is that Clemons and Madhani offer the very awkward economic argument, but one that I’ve observed with increasing frequency when it comes to search, that consumers cannot be trusted to make decisions that improve their own welfare.  For example, Clemons and Madhani concede that many of the practices they and others have criticized with respect to search provide consumer benefits.  However, Clemons and Madhani write:

It should be obvious that consumers are not always the best judges of their own welfare, and it should be obvious that consumers have extreme difficulty judging whether actions will improve their welfare if the results follow from complex interactions, occur after a significant delay, or both. The argument that government should help consumers through regulation sounds paternalistic, but if consumers were always the best judges of their long-term welfare, we would not have problems with smoking or obesity.

We know that consumers often make bad decisions when an experience is immediately pleasurable and when harm is deferred or the relationship between cause and effect are complex and not immediately visible. Free software is pleasurable. This free software is funded through excessive charges imposed on companies that need to pay to be found through search; consumers cannot readily observe the harm that comes from these excessive charges because the complex mechanisms by which these charges are passed along to consumers are not directly observable.

One need not be an extreme adherent to the notion that consumers generally behave rationally and in their self-interest to reject the contention that consumer preferences ought to be given zero weight in the analysis.  That’s not entire fair.  Clemons and Madhani do not give zero weight to consumer preferences; they appear to assign consumers’ valuation of these services negative weight.  That is, the authors argue not only that consumers are simply not capable of knowing whether they derive greater value from X or Y, but also that the fact that consumers choose X, ceteris paribus,  increases the likelihood that X is engaged in anticompetitive behavior.  Quite odd.  And certainly unrelated to any economic conception of consumer welfare.

So what is left of consumer welfare analysis without the consumers?  Its not a trick question.  How does one know that these consumers and their faulty preferences are actually harmed in practice?   Harm to rivals is sufficient, Clemons and Madhani appear to answer:

Google’s revision to its search engine, code-named Panda, substantially reduced the visibility of low quality sites, which is definitely a good thing. But the Panda release also seems to have slammed Ciao.co.uk, a Microsoft-owned company, and a potential competitor as a pricing comparison site, which had been leading an EU competition case against Google.

The real argument that Clemons and Madhani make is that consumers’ initial happiness with increased convenience from search bias helping them find what they are looking for will result in harm to rivals, such as online travel sites that want to be found, that these firms will pay higher fees that are invisible to consumers though they are passed on to them in the form of higher prices, and consumers will “remain content and oblivious to harm.”  It remains unclear as to how consumers, even ones that do not always behave in their best interest, will remain oblivious to higher prices.  There are lots of business models in which consumers do not know the internal cost structure of operating a business, or what percentage of what fees are ultimately passed on.  But the assumption that consumers are altogether insensitive to prices and price competition is an extreme and unrealistic one.

In any event, the explicit paternalism embedded in the approach here are obvious, and in my opinion misguided.  But just entertaining the argument on the merits for a moment, Clemons and Madhani concede that search bias and vertical integration provide at least some real short-term consumer benefits that must be weighed against the long-term competitive risks.  They write: “Consumers appear to be well-served at present, and consumers may even believe they are well-served at present, but ultimately and inevitably they will not be well-served in the future.”

This is not altogether unrelated to the right economic approach, i.e. the weighing of short-term benefits against long-term risks.  However, the authors make a key mistake in assessing the risks of harm to competition in the future, i.e. conflating harm to rivals with harm to the competitive process.  As I’ve written:

An antitrust inquiry would distinguish harm to competitors from harm to competition; it would focus its inquiry on whether bias impaired the competitive process by foreclosing rivals from access to consumers and not merely whether various listings would be improved but for Google’s bias.  The answer to that question is clearly yes.  The relevant question, however, is whether that bias is efficient.   Evidence that other search engines with much smaller market shares, and certainly without any market power, exhibit similar bias would suggest to most economists that the practice certainly has some efficiency justifications.  Edelman ignores that possibility and by doing so, ignores decades of economic theory and empirical evidence.  This is a serious error, as the overwhelming lesson of that literature is that restrictions on vertical contracting and integration are a serious threat to consumer welfare.

One might believe, given that Clemons and Madhani at least pay lip service to the notion that search bias improves consumer welfare, that they might advocate some sort of fact-intensive rule of reason analysis that attempted to ferret out anticompetitive examples of search bias or vertical integration from those that are pro-competitive.  Such an approach would at least be consistent with the economic literature on vertical integration — which tells a much different tale about the competitive effects of the practice.  The economic literature on vertical restraints and vertical integration provides no support for ex ante regulation arising out of the concern that a vertically integrating firm will harm competition through favoring its own content and discriminating against rivals.  Economic theory suggests that such arrangements may be anticompetitive in some instances, but also provides a plethora of pro-competitive explanations.  Lafontaine & Slade explain the state of the evidence in their recent survey paper in the Journal of Economic Literature:

We are therefore somewhat surprised at what the weight of the evidence is telling us. It says that, under most circumstances, profit-maximizing vertical-integration decisions are efficient, not just from the firms’ but also from the consumers’ points of view. Although there are isolated studies that contradict this claim, the vast majority support it. Moreover, even in industries that are highly concentrated so that horizontal considerations assume substantial importance, the net effect of vertical integration appears to be positive in many instances. We therefore conclude that, faced with a vertical arrangement, the burden of evidence should be placed on competition authorities to demonstrate that that arrangement is harmful before the practice is attacked. Furthermore, we have found clear evidence that restrictions on vertical integration that are imposed, often by local authorities, on owners of retail networks are usually detrimental to consumers. Given the weight of the evidence, it behooves government agencies to reconsider the validity of such restrictions.

John Maynard Keynes is quoted as saying “When the facts change, I change my mind. What do you do, sir?”  Given the economic evidence on vertical integration, and the degree to which it conflicts with Clemons and Madhani’s priors on its competitive effects, one might expect them to support a rule that at least made an attempt to retain the consumer benefits of vertical integration.  The second noteworthy point about their post, however, is just how much their policy position diverges from the lessons gleaned from the economic literature described above.  The authors would ban vertical integration altogether!  In their own words:

For this reason, we believe that search engines should be forbidden to engage in vertical integration into comparison of goods and services, or into direct sale of goods and services. We feel that this should be blocked irrespective of the mechanism used to create the vertical integration; search engine providers should not be allowed to develop this vertical integration internally nor acquire it through acquisition, regardless of assurances offered to regulators of fair pricing or Chinese walls.

Understanding the competitive economics of vertical integration and vertical contractual arrangements can be quite complex because there are generally anticompetitive theories of the conduct as well as efficiency explanations.  One must be very careful with the facts in these cases to avoid conflating harm to rivals arising from competition on the merits, with harm to competition arising out of exclusionary conduct.  Misapplication of even this nuanced approach can generate significant consumer harm in the form of error costs and reduced incentive to innovate.  Reasonable minds can differ on where to draw the lines on these issues, where to impose safe harbors, and how to allocate burdens.  An outright ban on vertical integration has none of these virtues and rejects mainstream antitrust economics and available evidence.  The unifying theme holding together the two noteworthy points in these posts is that both imply sacrificing consumer welfare in the interest of firms.

Filed under: antitrust, doj, economics, google, technology

The GAO has recently issued a report on medical devices.  The thrust of the report is that “high-risk” medical devices do not receive enough scrutiny from the FDA and that recalls are not handled well.  This report and other evidence indicates that the FDA is likely to require more testing of devices.  As of now, most medical devices are approved on a fast track that requires significantly less testing than that required for new drugs.  (As I have discussed in a forthcoming Cato Journal article, medical devices are also subject to more immunity from state produce liability lawsuits.)

The GAO report is remarkable.  The GAO defines its mission as

“Our Mission is to support the Congress in meeting its constitutional responsibilities and to help improve the performance and ensure the accountability of the federal government for the benefit of the American people. We provide Congress with timely information that is objective, fact-based, nonpartisan, nonideological, fair, and balanced.”

But the report on medical devices is entirely unbalanced.  It deals only with procedures for approval and the recall process (both of which are judged inadequate.)  There is no discussion of either costs or benefits.   That is, no evidence is presented that there is any actual harm from the “flawed” approval and recall processes.  Even more importantly, there is no evidence presented about the benefits to consumers from easy and rapid approval of medical devices.

As is well known, virtually all economists who have studied the FDA drug approval process have concluded that it causes serious harm by delaying drugs.  The import of the GAO Report is that we should duplicate that harm with medical devices.  This is an odd and perverse way of providing a “benefit” to the American people.

Filed under: consumer protection, cost-benefit analysis, regulation, torts Tagged: FDA, Medical Devices

Russell Korobkin (UCLA) provocatively declares the ultimate victory of behavioral law and economics over neoclassical economics:

I am declaring victory in the battle for the methodological soul of the law and economics discipline. There is no need to continue to pursue the debate between behavioralists (that is, proponents of incorporating insights previously limited to the discipline of psychology into the economic analysis of legal rules and institutions) and the defenders of the traditional faith in individual optimization as a core analytical assumption of legal analysis.

Behavioral law and economics wins.  And its not close.  Korobkin continues:

[T]he battle to separate the economic analysis of legal rules and institutions from the straightjacket of strict rational choice assumptions has been won, at least by and large.  The fundamental methodological assumption of rational-choice economics, that individual behavior necessarily maximizes subjective expected utility, given constraints, has been largely discredited as an unyielding postulate for the analysis of legal policy.  Yes, such an assumption, even if inaccurate, simplifies the world, but it does so in an unhelpful way, much in the way that it is unhelpful for a drunk who has lost his car keys in the bushes to search under the streetlamp because that is where the light is.

The paper is remarkable on many levels, few of them positive.   I understand Professor Korobkin is trying to be provocative; in this he succeeds.  I — for one — am provoked.  But one problem with claims designed to provoke is that they may sacrifice other virtues in exchange for achieving the intended effect.  In this case, humility and accuracy are the first — but not the last — to go.   Indeed, Korobkin begins by acknowledging (and marginalizing) those would deny victory to the behaviorists while magnanimously offering terms of surrender:

Not everyone has been won over, of course, but enough have to justify granting amnesty to the captured and politely ignoring the unreconstructed.

Unreconstructed.  I guess I’ll have to take that one.  Given the skepticism I’ve expressed (with Douglas Ginsburg) concerning behavioral law and economics, and in particular, the abuse of the behavioral economics literature by legal scholars, it appears capture is unlikely.   Indeed, Judge Ginsburg and I are publishing a critique of the behavioral law and economics movement — Behavioral Law and Economics: Its Origins, Fatal Flaws, and Implications for Liberty — in the Northwestern Law Review in January 2012.   A fuller development of the case for skepticism about behavioral law and economics can wait for the article; it suffices for now to lay out a few of the most incredible aspects of Korobkin’s claims.

Perhaps the most incendiary aspect of Korobkin’s paper is not a statement, but an omission.  Korobkin claims that rational choice economics has been “largely discredited as an unyielding postulate for the analysis of legal policy” — and then provides no citation for this proposition.  None.  Not “scant support,” not “conflicting evidence” — Korobkin dismisses rational choice economics quite literally by fiat.  We are left to infer from the fact that legal scholars have frequently cited two important articles in the behavioral law and economics canon (the 1998 article A Behavioral Approach to Law and Economics by Christine Jolls, Cass Sunstein and Richard Thaler and Law and Behavioral Science: Removing the Rationality Assumption from Law and Economics by Korobkin and Tom Ulen) that the behavioral approach has not only claimed victory in the marketplace for ideas but so decimated rational choice economics as to leave it discredited and “unhelpful.”  One shudders to consider the legion of thinkers chagrinned by Korobkin’s conclusive declaration.

Oh, wait.  The citations prove the behavioral law and economics is popular among legal scholars — and that’s about it.  I’ve no doubt that much is true.  If Korobkin’s claim was merely that behavioral law and economics has become very popular, I suppose that would be a boring paper, but the evidence would at least support the claim.  But the question is about relative quality of insight and analysis, not popularity.  Korobkin acknowledges as much, observing in passing that “Citation counts do not necessarily reflect academic quality, of course, but they do provide insight into what trends are popular within the legal academy.”   Undaunted, Korobkin moves seemlessly from popularity to the comparative claim that behavioral law and economics has “won” the battle over rational choice economics.   There is no attempt to engage intellectually on the merits concerning relative quality; truth, much less empirical validation, is not a mere matter of a headcount.

Even ceding the validity citations as a metric to prove Korobkin’s underlying claim — the comparative predictive power of two rival economic assumptions — what is the relative fraction of citations using rational choice economics to provide insights into legal institutions?  How many cites has Posner’s Economic Analysis of Law received?  Where is the forthcoming comparison of articles in the Journal of Law and Economics, Journal of Legal Studies, Journal of Political Economy, Journal of Law, Economics, and Organization, American Economic Review, etc.?  One might find all sorts of interesting things by analyzing what is going on in the law and economics literature.  No doubt one would find that the behaviorists have made significant gains; but one expecting to find rational choice economics has been discredited is sure to to be disappointed by the facts.

Second, notice that the declaration of victory comes upon the foundation of citations to papers written in 1998 and 2000.  The debate over the law and economics of minimum resale price maintenance took nearly a century to settle in antitrust law, but behavioral law and economics has displaced and discredited all of rational choice economics in just over a decade?  The behavioral economics literature itself is, in scientific terms, very young.  The literature understandably continues to develop.  The theoretical and empirical project of identifying the conditions under which various biases are observed (and when they are not) is still underway and at a relatively early point in its development.  The over-reaching in Korobkin’s claim is magnified when one considers the relevant time horizon: impatience combined with wishful thinking is not a virtue in scientific discourse.

Third, it is fascinating that it is consistently the lawyers, and mostly law professors, rather than the behavioral economists, that wish to “discredit” rational choice economics.  Similarly, rational choice economists generally do not speak in such broad terms about discrediting behavioral economics as a whole.  Indeed, behavioral economists have observed that “it’s becoming clear that behavioral economics is being asked to solve problems it wasn’t meant to address.  Indeed, it seems in some cases that behavioral economics is being used as a political expedient, allowing policymakers to avoid painful but more effective solutions rooted in traditional economics.”  There are, of course, significant debates between theorists concerning welfare implications of models, from empiricists interpreting experiments and field evidence.  It is the law professors without economic training that want to discredit a branch of economics.  It is important to distinguish here between behavioral economics and behavioral law and economics, and between rational choice economics and its application to law.  No doubt there are applications of rational choice economics to law that overreach and warrant deserved criticism; equally, there are abuses of behavioral economics in the behavioral law and economics literature.  It is a very productive exercise, and one in which law professors might have a comparative advantage, to identify and criticize these examples of overreaching in application to law.   But with all due respect to Professor Korobkin, if rational choice economics is going to be discredited — a prospect I doubt given its success in so many areas of the law — some economists are going to have to be involved.

Fourth, in the midst of declaring victory over rational choice economics, Korobkin doesn’t even bother to define rational choice economics correctly.  Korobkin writes:

To the extent that legal scholars wish to premise their conclusions on the assumption that the relevant actors are perfect optimizers of their material self-interest, they bear the burden of persuasion that this assumption is realistic in the particular context that interests them.

Elsewhere, Korobkin writes:

My central thesis, which runs through the three parts of the article to follow, is that now that law and economics has discarded the “revealed preferences” assumption of neoclassical economics – that individual behavior necessarily maximizes subjective expected utility . . .

This isn’t the rational choice argument; this barely suffices as a caricature of the rational choice assumption underlying conventional microeconomic analysis.  Korobkin falls victim to the all-too-common misunderstanding that the rational choice assumption is a descriptive assumption about each individual’s behavior.  Not only is that obviously incorrect, and I suspect Korobkin knows it; anyone with even a passing familiarity with rational choice literature realizes that a host of economists — Friedman, Becker, Stigler, and Alchian, to name a few — have long been interested in, understood, and incorporated irrational economic behavior into microeconomics.  The rational choice assumption has never been about describing the individual decision-making processes of economic agents.  Perhaps a model with a different assumption, e.g. that all individuals exhibit loss aversion or optimism bias (or half of them, or a quarter, or whatever), will offer greater predictive power.  Perhaps not.  Economists all agree that predictive power is the criterion for model selection.   That is the right debate to have (see, e.g., here), not whether law professors find uses for the behavioral approach to argue for various forms of paternalistic intervention — and, for note, is still the case that this literature is used nearly uniformly for such purposes by law professors.  Korobkin’s method of declaring methodological victory on the behalf of behavioral law and economics while failing to accurately describe rational choice economics is a little bit like challenging your rival to “take it outside,” and then remaining inside and gloating about your victory while he is waiting for the fight outside.

Korobkin defends his provocative declaration of victory with the argument that it allows him to “avoid an extended discussion” of a number of claims he has already deemed appropriate to dismiss (mostly through conventional strawman approaches) in favor of focusing on new and exciting challenges for the behaviorists.  I offer two observations on the so-called benefits of declaring victory while the battle is still being waged.  The first is that avoiding evidence-based debate is a bug rather than a feature from the perspective of scientific method.  The second is a much more practical exhortation against premature celebration: you can lose while you admire the scoreboard.  Anyone who has ever played sports knows it is best to “play the whistle.”

One final observation.  I recall from Professor Korobkin’s website bio that he is a Stanford guy.  You’d think he’d be a little bit more sensitive to the risk of losing the game while the band prematurely celebrates victory.

Filed under: antitrust, behavioral economics, economics, law and economics, legal scholarship, scholarship

Summary

Free lunches are hard to turn down for a city staring into the fiscal abyss. As it faces dwindling revenues and the increased demand for public services that usually accompanies a recession, Philadelphia, like most other U.S. cities, is looking for new ways to make a buck. However, with unemployment above 10 percent and a fear of providing even more excuses for businesses and more-affluent residents to flee for the suburbs, the city is not inclined to hike income and property taxes.

Spurred by this bleak outlook, Mayor Michael Nutter, like politicians in New York, California, and a host of other places, has hit upon an ingenious idea. Given that, among its other problems, Philadelphia is wrestling with a growing obesity epidemic, why not kill two birds with one stone and tax sodas? While taxing cheesesteaks or Tastykakes might lead to protests up and down Broad Street, a few additional cents’ tax on each soda sold in the city holds the prospect of expanding the budget while trimming waistlines.

This double-dividend argument has been used before by public finance scholars in other contexts, from fossil fuels to alcohol. While almost all taxes are problematic because, in the process of raising revenues, they discourage a desirable activity, taxing “bad” activities supposedly generates cash flow while discouraging the underlying activity.

News comes that the DOJ and SEC are “examining whether some of the world’s biggest banks colluded to manipulate a key interest rate before and during the financial crisis, affecting trillions of dollars in loans and derivatives, say people familiar with the situation.”  The Wall Street Journal Reports that:

The inquiry, led by the U.S. Justice Department and Securities and Exchange Commission, is analyzing whether banks were understating their borrowing costs. At the time, banks were struggling with souring assets on balance sheets and questions about liquidity. A bank that borrowed at higher rates than peers would likely have signaled that its troubles could be worse than it had publicly admitted.

Roughly $10 trillion in loans and $350 trillion in derivatives are tied to Libor, which affects costs for everything from corporate bonds to car loans. If the rate was kept artificially low, borrowers likely weren’t harmed, though lenders could complain that the rates they charged for loans were too low. Derivatives contracts could be mispriced because of any manipulation of Libor.

Filed under: antitrust, banking, cartels, economics, financial regulation