Blue Sky 2017-2018

Topic: The Effect of Disability Insurance Receipt on Mortality

• Bernard Black, Nicholas J. Chabraja Professor at Northwestern University Law School, Professor of Finance

Location: Jerome Greene Hall, Room 646

Abstract: This paper estimates the effect of Disability Insurance and Supplemental Security Income benefit receipt on mortality, for those on the margin to receive benefits or not. Those receiving benefits receive large cash transfers, and health insurance from Medicare or Medicaid, but also face important work disincentives. Each of these factors could affect mortality. The income and health insurance benefits likely reduce mortality, but the work disincentive could increase mortality. Identifying the overall mortality effect is difficult, however, because those allowed benefits may be unobservably less healthy than those denied. We exploit the random assignment of judges to disability insurance cases to create instrumental variables that address this selection problem. We find considerable heterogeneity in the mortality response. For marginal recipients, who receive benefits if seen by lenient judges, but would be denied by stricter judges, we find no detrimental effects of being denied on mortality. Instead, we find higher mortality for these individuals within the first 10 years of benefit receipt, consistent with the view that working is beneficial for health. However, Marginal Treatment Effects estimates suggest that benefit receipt reduces mortality for inframarginal benefit recipients, who would receive benefits even if seen by a relatively strict judge. These findings suggest that for maximizing the longevity of DI applicants, the current disability thresholds are close to the right level.

Topic: Evidence Suppression by Prosecutors: Violations of the Brady Rule

• Andrew F. Daughety, the Gertrude Conaway Vanderbilt Professor of Economics and Professor of Law, Vanderbilt University, and Jennifer F. Reinganum, E. Bronson Ingram Professor of Economics and Professor of Law, Vanderbilt University

Location: Jerome Greene Hall, Room 546

See additional figures for article

Abstract: We develop a model of individual prosecutors (and teams of prosecutors) to address the incentives for the suppression of exculpatory evidence. Our model assumes that each individual prosecutor trades off a desire for career advancement (by winning a case) and a disutility for knowingly convicting an innocent defendant. We assume a population of prosecutors that is heterogeneous with respect to this disutility, and each individual’s disutility rate is their own private information. A convicted defendant may later discover exculpatory information; a judge will then void the conviction and may order an investigation. Judges are also heterogeneous in their opportunity costs (which is each judge’s private information) of pursuing suspected misconduct. We show that the equilibrium information configuration within the team involves concentration of authority about suppressing/disclosing evidence. We further consider the effect of angst about teammate choices, office culture, and the endogenous choice of effort to suppress evidence.

Topic: Japan Is Changing: Freedom of Change and Complementarity between Inter- and Intra-Corporate Systems (paper forthcoming)

• Zenichi Shishido, Professor of Law, Hitotsubashi University Graduate School of International Corporate Strategy and Short-Term International Visiting Professor of Law, Columbia Law School

Location: Jerome Greene Hall, Room 646

Authors: Ronald Gilson and Zenichi Shishido

Abstract: In the Japanese corporate system from the 1960s to the 1980s, three factors—strong internal governance (i.e., company community), weak external governance (i.e., mochiai-main bank governance), and relationship-based B2B transactions (i.e., keiretsu)—were considered to be complementary of each other.

Today, Japan is changing. Amidst this process of change, we observe the following two phenomena. First, within a single country, there are various speeds and directions of change, depending on the industry and the company. Second, while B2B transactions and external governance have changed in many respects, it seems as though internal governance has not changed so much.

These two phenomena can be explained by the following hypothesis. First, B2B transactions and corporate governance are complementary, and can be characterized by a balance between exit-oriented factors and trust-oriented factors. Second, internal governance and external governance are substitutive. The corporate governance of each company will strike a balance between the two. And third, the speed of change is different between B2B transactions and corporate governance because internal governance is not easy to change without strong initiative by the controlling shareholder.

Topic: Sedimentary Innovation: Responding to Incremental Change

• Cristie Ford, Associate Professor, Allard School of Law, University of British Columbia

Location: Jerome Greene Hall, Room 646

Abstract: What if the greatest challenge facing regulation today is not erratic executive action, or lack of political will, or under-resourcing (though of course these matter)? Instead, what if the most profound and significant challenge facing regulation — not only today, but continually — is private sector innovation?

Innovation is the product of that most cherished good, human creativity. It carries with it the prospect of problems solved and diseases eradicated, of fresh adventures and a larger pie. Sometimes the debate is more nuanced, but for most people most of the time, to be anti-innovation is still to be unenlightened, fearful, backward, and blind to possibility. Change-resisters—individuals, corporations, states, even species specialists like migratory songbirds and polar bears—are doomed, often tragically, to the wrong side of history. Our public policy choices and our public dialogue endlessly reflect this, often speaking of innovativeness as if there could be no higher compliment.

Topic: Directors’ Rewards: A Compliance-Focused Reappraisal

• John Armour, Stephen and Barbara Friedman Visiting Professor of Law at Columbia Law School (Fall 2017), Hogan Lovells Professor of Law and Finance at Oxford University, Fellow of the European Corporate Governance Institute

Location: Jerome Greene Hall, Room 807

Abstract: This paper considers the relationship between changes in directorial compensation and directors’ liability for compliance oversight. We make two claims. First, as a positive matter, the shift to stock-based pay has the propensity to undermine directors’ engagement with compliance oversight where this conflicts with shareholder value. We describe two distinct ways in which this occurs, through short-termism in stock-based compensation generally and upside bias in option-based compensation more specifically.

Second, in the light of the changes in compensation practice, we argue it is appropriate to rethink the scope of judicial scrutiny of boards’ compliance oversight. Although corporations’ compliance obligations have grown since 1996, and compensation practices have changed in ways that tend to compromise boards’ ability to meet them, the Caremark doctrine has remained static. Moreover, the expectation that directors will receive and accumulate company stock provides a discrete target for liability recoveries that does not extend beyond the director’s firm-specific wealth and thus ought not substantially to diminish a director’s willingness to serve.

Topic: Do Employers’ Neighborhoods Predict Racial Discrimination?

• Sonja Starr, Professor of Law and Co-director, Empirical Legal Studies Center, University of Michigan Law School (Ann Arbor, MI)

Location: Jerome Greene Hall, Room 701

Abstract: This paper uses evidence from a large field experiment to explore whether the racial composition of employers’ neighborhoods, as well as other neighborhood and business characteristics, predicts racially discriminatory employment decisions. Over 15,000 fictitious job applications were sent, in otherwise-similar black and white pairs, to low-skill job postings distributed throughout New Jersey and New York City. Overall, white applicants received 23% more callbacks than equivalent black applicants. The white advantage was much larger in whiter and less black neighborhoods. We interpret this pattern to suggest some form of in-group preference and/or irrational stereotypes; the pattern cannot readily be explained by “rational” statistical discrimination. In prior work on Ban-the-Box laws, we showed that when employers lack access to criminal records they appear to make exaggerated negative assumptions about the likely criminality of black applicants. We now show that this effect too was driven by employers in less black neighborhoods, and conversely that this apparent stereotyping pattern can explain some (but not most) of the effect of neighborhood composition on the black/white callback gap.

Real-world black applicants are presumably more likely to apply to jobs in black neighborhoods (and white applicants to jobs in white neighborhoods) because they are more likely to live nearby. Through simulations that re-weight our results geographically to mirror a real-world population distribution by race, we show that this geographic self-sorting will likely greatly magnify the net disadvantage that black applicants face, rather than mitigating it. This is because within each of these jurisdictions, job availability and overall callback rates are lower in nonwhite neighborhoods.

Other local characteristics, including partisan vote share, crime rates, income, and poverty rates, did not predict racial discrimination rates once racial composition was controlled for, nor did observable business characteristics or the other varied characteristics of our applicants. The white advantage was much larger in New Jersey than in New York City, even after accounting for neighborhood-level differences.

Topic: Race and Consumer Bankruptcy

• Edward Morrison, Charles Evans Gerber Professor of Law, Columbia Law School

Location: Jerome Greene Hall, Room 807

Abstract: Among consumers who file for bankruptcy, African Americans file Chapter 13 petitions at substantially higher rates than other racial groups. Some have hypothesized that the difference is attributable to discrimination by attorneys, who “steer” African American debtors into Chapter 13, instead of Chapter 7, which is less lucrative for the attorneys. We explore an alternative hypothesis: Among distressed consumers, African Americans have longer commutes to work and supermarkets, rely more heavily on cars for these commutes, and therefore have greater demand for a bankruptcy process (Chapter 13) that allows them to retain their cars. We begin by showing that African Americans tend to have longer commuting times than other consumers and, when they do have longer commuting times, they also have relatively high Chapter 13 filing rates. We show this using data from Atlanta, Chicago, and Memphis, each of which has been identified as a location with overrepresentation of African Americans in Chapter 13. We then test our hypothesis that African Americans’ reliance on automobiles is a cause of their substantially higher use of Chapter 13. We do this using data from Chicago, where the the city recently implemented an aggressive program to collect parking debts by seizing the cars and suspending the licenses of consumers with large debts. We show that this city-wide program disproportionately affected African Americans living on the West and South Sides of the City. Because African Americans were most affected by the program, their share of Chapter 13 filings increased substantially. Although we do not disprove the possibility of discrimination by attorneys, our data show that selection effects are potentially as important in explaining racial patterns in Chapter 13 cases.

Topic: Unmarked? Criminal Record Clearing and Employment Outcomes

• Justin McCrary, Professor of Law and Director, Social Science Data Laboratory, at University of California Berkeley School of Law (Berkeley, CA)

Location: Jerome Greene Hall, Room 701

Abstract: An estimated one in three American adults has a criminal record. While some records are for serious offenses, most are for arrests or relatively low level misdemeanors. In an era of heightened security concerns, easily available data and increased criminal background checks, these records act as a substantial barrier to gainful employment and other opportunities. Harvard sociologist Devah Pager describes people with criminal records as with a negative job credential.

In response to this problem, lawyers have launched unmarking programs to help people take advantage of legal record clearing remedies. We study a random sample of participants in one such program to analyze the impact of the record clearing intervention on employment outcomes. Using methods to control for selection bias and the effects of changes in the economy in our data, we find evidence that: (1) the record clearing intervention boosts participants’ employment rates and average real earnings, and (2) people seek record clearing remedies after a period of suppressed earnings.

More research needs to be done to understand the durability of the positive impact and its effects in different local settings and labor markets, but these findings suggest that the record clearing intervention makes a meaningful difference in employment outcomes for people with criminal records. The findings also suggest the importance of early intervention to increase opportunities for people with criminal records. Such interventions might include more legal services, but they might also include record clearing by operation of law or another mechanism that does not put the onus of unmarking on the person with a criminal record.

Topic: Institutional and Organizational Analysis: Concepts and Applications (Cambridge University Press, forthcoming)

• Lee Allston, Director, Vincent and Elinor Ostrom Workshop in Political Theory and Policy Analysis and Affliated Professor of Law, Indiana University, Maurer School of Law (Bloomington, IN)

Location: Jerome Greene Hall, Room 701

View Introduction to Part III, Chapter 8, and Chapter 9

Abstract: Beliefs shape the choices of institutions. Beliefs are generally stable, but shocks that cause sufficiently unexpected economic and political outcomes make beliefs malleable and create a window of opportunity for changing beliefs. Within these windows of opportunity, leadership can play a role in shaping a new belief among the dominant organizations that in turn generates new institutions and over time a possible transition to a new developmental trajectory.

Topic: The Law and Macroeconomics of Corporate Governance

• Joshua Mitts, Associate Professor of Law at Columbia Law School

Location: WJWH 600

Abstract: Corporate governance has long focused on the microeconomic benefits of change while giving less attention to the macroeconomic consequences of instability. The classical justification for ignoring volatility is diversification. Portfolio theory shows that diversified investors should be indifferent to idiosyncratic risk, and firm-specific governance changes should add little to the total variance of a diversified investor’s portfolio.

But the effects of governance changes are not necessarily confined to individual firms. For example, layoffs can enhance efficiency but also impose adjustment costs as employees search for new jobs and forego consumption (Gordon, 2017). While disagreement and difference of opinion often lead to better decisions, they can also increase aggregate volatility in product, labor and capital markets. Investors cannot diversify away macroeconomic volatility, and these costs are generally not internalized by activists and other shareholders agitating for change.

In this project, I consider the implications of macroeconomic instability for corporate governance. I distinguish the impact of aggregate volatility from classical distributional considerations. Even if tax policy were to facilitate perfect income redistribution, macro-volatility would still impose costs on fully diversified shareholders whose wealth is invested in the capital markets. Instability is a first-order consideration when evaluating the welfare implications of corporate governance institutions.

Topic: Derivatives Deconstructed (paper forthcoming)

• Dan Awrey, Visiting Professor of Law, Columbia Law School (Fall 2017) and Associate Professor of Law and Finance and Fellow of Linacre College, Faculty of Law, Oxford University, UK

Location: WJWH 600

Abstract: Derivatives are sophisticated financial instruments that bundle elements of state-contingent contracting, the formal allocation of property and decision-making rights, and informal mechanisms such as reputation and the expectation of future dealings. This hybridity splits every derivative contract into two separate contracts: one that governs under normal market conditions, and another that governs under conditions of fundamental uncertainty. In good times, derivative contracts contemplate the near automatic determination and performance of each counterparty's obligations. In bad times, these contracts include various mechanisms designed to provide counterparties with the flexibility to incorporate new information, fill contractual gaps, and facilitate efficient renegotiation.

Deconstructing derivative contracts in order to highlight their inherent hybridity yields a number of important policy insights. These insights relate to (i) whether derivatives should be regulated as securities, (ii) the desirability of allowing clearinghouses to unilaterally restructure the derivative portfolios of failed counterparties, (iii) the promise and perils of using distributed ledger technology and smart contracts to create a new infrastructure for the execution, clearing, and settlement of derivative contracts, and (iv) the important role played by central banks as dealers of last resort during periods of fundamental uncertainty and financial instability.

Topic: Adolf Berle and Political Economy

• Nicholas Lemann, Joseph Pulitzer II and Edith Pulitzer Moore Professor of Journalism, Columbia Journalism School, Dean Emeritus at Columbia Journalism School

Location: Jerome Greene Hall, Room 646

Abstract: Most legal scholars think of Columbia law professor Adolf Berle (1895-1971) as the author of a series of highly influential law review articles, written when he was very young, proposing the idea that in the American corporation, ownership had become separated from control—meaning that managers of corporations could effectively ignore their passive and widely distributed shareholders. But Berle also considered himself to be one of the world’s major political philosophers (Columbia College for many years assigned his work to all first-year students taking the Contemporary Civilization course), and he had the good fortune of being, in addition, a highly influential advisor to two important politicians, Franklin Roosevelt and Fiorello La Guardia, so his ideas had consequences. This talk, by a journalist working on a narrative history, will focus on Berle’s vision of a good American society, which was rooted in but went far beyond his work on corporate governance: what it was, and what its strengths and weaknesses turned out to be.

Topic: Irrelevance Theorem of Governance Structure (co-authored with Doron Yizhak Levit)

• Zohar Goshen, Alfred W. Bressler Professor of Law, Columbia Law School, and Director, Center for Israeli Studies, Columbia Law School

Location: Jerome Greene Hall, Room 602

Abstract: We develop a model analyzing the conditions under which the allocation of control rights between a shareholder and a manager is irrelevant to the firm value. In our model managers differ in their competence and integrity and shareholders only differ in their competence. Given their type, managers can either create value or destroy value and consume private benefits. Given a shareholder’s competence, she then needs to deduct from the decision made by the manager whether he should be retained or fired. The allocation of control rights allowing a shareholder to fire a manager can scale from easy to impossible. We show that as long as shareholders do not have perfect competence, and managers with meaningful career concerns are likely to do as much harm as good, the allocation of control rights is irrelevant to firm value. Our result has two important implications. First, to the study of corporate governance structures: it encourages specifying the conditions explaining why one will assume a certain allocation of control rights is consistently better than others (beyond the mere risk of agency cost). Second, to the absence of valuation models for control rights: it explains why developing such a model is impossible; a valuation model requires abstracting away from firm specific elements, but doing so will result in control rights having no value at all.