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Do Positive Externalities Always Justify Government Subsidies? Some Insights From the Austrians and Public Choice

TOTM The folks over at Lawyers, Gun$, and Money are chiding me for ignoring (or, as they say, never having heard of) positive externalities. A couple . . .

The folks over at Lawyers, Gun$, and Money are chiding me for ignoring (or, as they say, never having heard of) positive externalities. A couple of days ago, I criticized a NYT editorial calling for the federal government to “throw its weight behind” private efforts to develop alternative fuels. My main point was that the best thing the government could do would be to let energy prices rise in response to forces of supply and demand. High prices, I argued, have spurred — and will continue to spur — private investment in alternative technologies.

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Henry Manne on Behavioral Finance & Insider Trading

TOTM When Henry Manne writes about insider trading, as he does this week in the WSJ op-ed, one can be sure that it is worth reading. . . .

When Henry Manne writes about insider trading, as he does this week in the WSJ op-ed, one can be sure that it is worth reading. The op-ed, which is the first installment of a two part series, offers two central points: (1) the behavioral finance literature does not support the regulation of insider trading, but has pushed usefully pushed economists to think beyond the realm of the “marginal trader” and into a Hayekian theory of price formation, and (2) this “wisdom of crowds” approach to price formation provides a new rationale insider trading regulations.

Read the full piece here.

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Financial Regulation & Corporate Governance

Alternative Fuels: Let Markets, Not Government, Decide.

TOTM It’s a strange day when the New York Times advocates corporate tax breaks. It’s an even stranger day when I dissent from that recommendation. Well, . . .

It’s a strange day when the New York Times advocates corporate tax breaks. It’s an even stranger day when I dissent from that recommendation. Well, today must be a strange day indeed, for they did, and I must.

Read the full piece here.

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Innovation & the New Economy

More on Wal-Mart and Organics

TOTM An article from yesterday’s W$J sheds some light on the organic community’s anger over Wal-Mart’s decision to begin selling organic products. A few weeks ago, . . .

An article from yesterday’s W$J sheds some light on the organic community’s anger over Wal-Mart’s decision to begin selling organic products. A few weeks ago, I accused Wal-Mart’s critics of wanting to keep price-sensitive consumers out of the organic “club.” The article in yesterday’s Journal suggests that that’s part of the story, but that the critics might also have a legitimate gripe. Examined closely, though, even that concern is unfounded.

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Intellectual Property & Licensing

Do Any (Other) Law Schools Have A Dominant Paradigm?

TOTM An exchange between Ethan Leib at Prawfsblawg and Kate Litvak in the comments to Ethan’s very interesting post on political science in the academy raises . . .

An exchange between Ethan Leib at Prawfsblawg and Kate Litvak in the comments to Ethan’s very interesting post on political science in the academy raises some interesting questions about the status of law and economics in the legal academy.

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Some Thoughts on Tradeable Gasoline Rights

TOTM Marty Feldstein has an interesting idea about how to reduce America’s oil consumption, but I’m not quite ready to sign on. In an op-ed in . . .

Marty Feldstein has an interesting idea about how to reduce America’s oil consumption, but I’m not quite ready to sign on.

In an op-ed in yesterday’s WSJ, Feldstein proposed a “cap and trade” system for gasoline. Under the proposed system, the government would set a limit on the amount of gasoline Americans could purchase annually and would then allocate rights to purchase that amount of gasoline.

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Incomplete Contracts and Opportunism in Franchising Arrangements

Scholarship Abstract Economic theorists argue that broad termination rights allow franchisors to police opportunism on the part of franchisees which have an incentive to free ride . . .

Abstract

Economic theorists argue that broad termination rights allow franchisors to police opportunism on the part of franchisees which have an incentive to free ride on the franchised trademark. However, in principle, these termination rights could generate another form of opportunism as franchisors then have an incentive to skim establishments that prove to be particularly profitable. We use the adoption of state franchise termination laws to determine which form of opportunism is more important on the margin. Using panel data on fast food establishments, we find that laws restricting franchisor termination rights lead to a reduction in franchising, and this reduction is not offset by the concomitant increase in franchisor-operated establishments. We also examine state employment rates in industries characterized by high rates of franchising relative to other industries where franchising is rare, finding that employment in franchise industries drops, as a proportion of total employment, by about 7 percent when states enact restrictions on franchisor termination rights. Both sets of results imply that the potential for franchisee opportunism is stronger, and restrictions on termination rights are likely to reduce joint surplus among franchisors and franchisees.

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Financial Regulation & Corporate Governance

Buy or Die, Update

TOTM Via Marginal Revolution, I came across this letter from the National Kidney Foundation to the AEI in anticipation of AEI’s upcoming event (June 12th) addressing . . .

Via Marginal Revolution, I came across this letter from the National Kidney Foundation to the AEI in anticipation of AEI’s upcoming event (June 12th) addressing the national organ shortage (previous post here).

Read the full piece here.

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The New Vote Buying: Empty Voting and Hidden (Morphable) Ownership

Scholarship Abstract Corporate law generally makes voting power proportional to economic ownership. This serves several goals. Economic ownership gives shareholders an incentive to exercise voting power . . .

Abstract

Corporate law generally makes voting power proportional to economic ownership. This serves several goals. Economic ownership gives shareholders an incentive to exercise voting power well. The coupling of votes and shares makes possible the market for corporate control. The power of economic owners to elect directors is also a core basis for the legitimacy of managerial authority. Both theory and evidence generally support the importance of linking votes to economic interest. Yet the derivatives revolution and other capital markets developments now allow both outside investors and insiders to readily decouple economic ownership of shares from voting rights. This decoupling, which we call the new vote buying, has emerged as a worldwide issue in the past several years. It is largely hidden from public view and mostly untouched by current regulation.

Hedge funds have been especially creative in decoupling voting rights from economic ownership. Sometimes they hold more votes than economic ownership – a pattern we call empty voting. In an extreme situation, a vote holder can have a negative economic interest and, thus, an incentive to vote in ways that reduce the company’s share price. Sometimes investors hold more economic ownership than votes, though often with morphable voting rights – the de facto ability to acquire the votes if needed. We call this situation hidden (morphable) ownership because the economic ownership and (de facto) voting ownership are often not disclosed.

This Article analyzes the new vote buying and its potential benefits and costs. We set out the functional elements of the new vote buying and develop a taxonomy of decoupling strategies. We also propose a near-term disclosure-based response and outline a menu of longer-term regulatory choices. Our disclosure proposal would simplify and partially integrate five existing, inconsistent ownership disclosure regimes, and is worth considering independent of its value with respect to decoupling. In the longer term, other responses may be needed: we discuss strategies focused on voting rights, voting architecture, and supply and demand forces in the markets on which the new vote buying relies.

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Financial Regulation & Corporate Governance