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Abstract:
The June 1999 and January 2001 proposals by the Bank for International Settlements (BIS) Basel Committee on Banking Supervision to include borrowers' credit ratings in assessments of the adequacy of banks' capital have heightened general interest in the credit rating industry: Who the industry's firms are; what they do; how they do it; and what the consequences of their actions are. This paper uses the structure-behavior-performance paradigm of industrial organization to shed light on the credit rating industry and to provide a framework for arranging initial observations and developing questions for further analysis. A striking fact about the structure of the industry in the U.S. is its persistent fewness of incumbents. There have never been more than five general-purpose bond rating firms; currently there are only three. Network effects users' desires for consistency of rating categories across issuers are surely part of the explanation. But, for the past 25 years, regulatory restrictions (by the Securities and Exchange Commission) on who can be a nationally recognized securities rating organization (NRSRO) have surely also played a role. A curious part of the behavior of the rating firms is their coverage and their pricing. Hypotheses to explain this behavior are explored. Although only limited information on profitability is available, it appears that bond rating is quite profitable. A growing regulatory demand for ratings (for safety-and-soundness regulation by bank regulators, insurance regulators, pension fund regulators, and securities regulators) and a regulatory limitation on supply surely are contributory factors. The BIS proposals, if adopted, will accentuate these trends for the U.S. and other industrial countries. There is an alternative to these growing regulatory pressures. It would involve the safety and soundness regulators' becoming more directly involved in regulatory judgments, rather than abdicating these judgments to private sector bond rating firms. The SEC, and its counter parts abroad, could then vacate their roles as the certifier of credit rating firms. These suggestions do not mean that the credit rating firms should be prevented from playing a continuing role in helping issuers and investors pierce the fog of asymmetric information in financial markets. But that role should be determined by the market participants themselves, not byadditional regulation that artificially increases demand and restricts supply. The latter is a recipe for shortages, rents, and distortions. This is not a welcome prospect.

Abstract:
The June 1999 and January 2001 proposals by the Bank for International Settlements (BIS) Basel Committee on Banking Supervision to include borrowers' credit ratings in assessments of the adequacy of banks' capital have heightened general interest in the credit rating industry: Who the industry's firms are; what they do; how they do it; and what the consequences of their actions are. This paper uses the structure-behavior-performance paradigm of "industrial organization" to shed light on the credit rating industry and to provide a framework for arranging initial observations and developing questions for further analysis.

A striking fact about the structure of the industry in the U.S. is its persistent fewness of incumbents. There have never been more than five general-purpose bond rating firms; currently there are only three. Network effects - users' desires for consistency of rating categories across issuers - are surely part of the explanation. But, for the past 25 years, regulatory restrictions (by the Securities and Exchange Commission) on who can be a "nationally recognized statistical rating organization" (NRSRO) have surely also played a role.

A curious part of the behavior of the rating firms is their coverage and their pricing. Hypotheses to explain this behavior are explored.

Although only limited information on profitability is available, it appears that bond rating is quite profitable. A growing regulatory demand for ratings (for safety-and-soundness regulation by bank regulators, insurance regulators, pension fund regulators, and securities regulators) and a regulatory limitation on supply surely are contributory factors. The BIS proposals, if adopted, will accentuate these trends for the U.S. and other industrial countries.

There is an alternative to these growing regulatory pressures. It would involve the safety-and-soundness regulators' becoming more directly involved in regulatory judgments, rather than abdicating these judgments to private-sector bond rating firms. The SEC, and its counterparts abroad, could then vacate their roles as the certifier of credit rating firms.

These suggestions do not mean that the credit rating firms should be prevented from playing a continuing role in helping issuers and investors pierce the fog of asymmetric information in financial markets. But that role should be determined by the market participants themselves, not by additional regulation that artificially increases demand and restricts supply. The latter is a recipe for shortages, rents, and distortions. This is not a welcome prospect.

Abstract:
The reciprocal interlocking of chief executive officers (CEOs) is a non-trivial phenomenon of the composition of boards of directors and of corporate governance: among large companies in 1991, about one company in seven was part of a relationship whereby the CEO of one company sat on a second company's board and the second company's CEO sat on the first company's board. We are aware of no previous efforts to explain these reciprocal relationships. We hypothesize that reciprocal CEO interlocks are (a) more likely when a board has more outside directorships, (b) less likely when a CEO has more of his total annual compensation paid in the form of stock options, (c) less likely when a company's board is more active and holds more meetings, (d) less likely when a CEO has a larger ownership share of his company, and (e) more likely when there are more CEOs from other companies as outside directors on a CEO's board. Using a sizable sample of large companies in 1991, we employ simple probit and step probit models to test these hypotheses, with the use of control variables that encompass other company, board, and CEO characteristics. These multivariate analyses support our first three conjectures but do not support the remaining two.

Since there is considerable academic and policy debate concerning board composition and the effectiveness of interlocking directorships in general, investigations focusing on reciprocal CEO interlocks, which link the highest ranked executives of two different firms, represent a significant contribution to the knowledge base in this field.

Interlocking directorates, CEOs, Board of directors, Corporate governance; Stock options

Abstract:
Network neutrality is a policy proposal that would regulate how network providers manage and price the use of their networks. Congress has introduced several bills on network neutrality. Proposed legislation generally would mandate that Internet service providers exercise no control over the content that flows over their lines and would bar providers from charging more for preferentially faster access to the Internet. These proposals must be considered carefully in light of the underlying economics. Our basic concern is that most proposals aimed at implementing net neutrality are likely to do more harm than good.

network neutrality, legislation, economics

Abstract:
We study the dynamics of market entry following mergers and acquisitions (M&As) using banking industry data. The findings suggest that M&As are associated with significant subsequent increases in the probability of entry and may explain more than 20% of entry in metropolitan markets, and more than 10% of entry in rural markets. These findings also suggest that entry may be part of an ?external? effect of M&As that helps supply credit to some relationship-dependent small business borrowers. Our results are robust to use of alternative econometric methods, changes in specifications of the exogenous variables, and alteration of the data samples.

Entry, Bank, Mergers

Abstract:
The question of Microsoft's market power (if any) and what to do about it (if anything) has attracted a great deal of attention in the political world and the media, as well as by specialists in antitrust policy. It has also generated significant antitrust litigation. A common claim in the media is that the antitrust laws, written a century ago for application to "smokestack industries," are difficult to apply to the software industry (and to other information-based industries). This paper will argue that, contrary to these claims, the antitrust issues surrounding Microsoft are not new and can be readily comprehended by use of an analogy to a familiar (and relatively low tech) industry, railroads.

Abstract:
The deregulation of the telephone industry has been a major task of public policy for the past two decades. There have been some outstanding achievements but also some serious frustrations ? especially in the deregulation of local telephone service. This paper notes the parallels (as well as the differences) between the experience of railroad deregulation to distill and the lessons for and limits of telephone deregulation.

Abstract:
For the wide range of antitrust cases involving allegations of monopoly or monopolization (or variations on that theme), the presence of market power is a necessary prerequisite for finding liability. In turn, the definition or delineation of a relevant market is essential for measuring a defendant's market share -- a key determinant of the presence or absence of market power. Unfortunately, there are few or no intellectual underpinnings for the market definition process in monopolization cases. This void contrasts sharply with the substantial conceptual developments of the past two decades with respect to the market definition process in antitrust merger analysis, as embodied in the Merger Guidelines of the U.S. Department of Justice.This article contrasts the achievements in the merger analysis area with the continuingdilemmas and conundrums in the monopolization area with respect to market definition. In the latter area the "cellophane fallacy" (which is explained), combined with the frequently cloudy state of firm levelprofit data, continues to create confusion as to when the presence of competitors is an indication of the absence of market power and when their presence is the consequence of the exercise of market power. Underlying this confusion is the absence of a clear market definition paradigm for these monopolization cases. Until such a paradigm is developed, the confusion will persist, as will a patternof erratic and inconsistent outcomes in alleged monopolization cases.

Abstract:
For the wide range of antitrust cases involving allegations of monopoly or monopolization (or variations on that theme), the presence of market power is a necessary prerequisite for finding liability. In turn, the definition or delineation of a relevant market is essential for measuring a defendant's market share -- a key determinant of the presence or absence of market power. Unfortunately, there are few or no intellectual underpinnings for the market definition process in monopolization cases. This void contrasts sharply with the substantial conceptual developments of the past two decades with respect to the market definition process in antitrust merger analysis, as embodied in the Merger Guidelines of the U.S. Department of Justice.

This article contrasts the achievements in the merger analysis area with the continuing dilemmas and conundrums in the monopolization area with respect to market definition. In the latter area the "cellophane fallacy" (which is explained), combined with the frequently cloudy state of firm-level profit data, continues to create confusion as to when the presence of competitors is an indication of the absence of market power and when their presence is the consequence of the exercise of market power. Underlying this confusion is the absence of a clear market definition paradigm for these monopolization cases. Until such a paradigm is developed, the confusion will persist, as will a pattern of erratic and inconsistent outcomes in alleged monopolization cases.

Abstract:
For the wide range of antitrust cases involving allegations of monopoly or monopolization (or variations on that theme), the presence of market power is a necessary prerequisite for finding liability. In turn, the definition or delineation of a relevant market is essential for measuring a defendant's market share -- a key determinant of the presence or absence of market power. Unfortunately, there are few or no intellectual underpinnings for the market definition process in monopolization cases. This void contrasts sharply with the substantial conceptual developments of the past two decades with respect to the market definition process in antitrust merger analysis, as embodied in the Merger Guidelines of the U.S. Department of Justice.

This article contrasts the achievements in the merger analysis area with the continuing dilemmas and conundrums in the monopolization area with respect to market definition. In the latter area the "cellophane fallacy" (which is explained), combined with the frequently cloudy state of firm-level profit data, continues to create confusion as to when the presence of competitors is an indication of the absence of market power and when their presence is the consequence of the exercise of market power. Underlying this confusion is the absence of a clear market definition paradigm for these monopolization cases. Until such a paradigm is developed, the confusion will persist, as will a pattern of erratic and inconsistent outcomes in alleged monopolization cases.

Abstract:
Financial innovation has been described as the life blood of efficient and responsive capital markets. Yet, there have been few quantitative investigations of financial innovation and the diffusion of these new technologies. Of the latter, there have been only three prior quantitative studies, and all three used the same data set on ATMs! This paper makes a significant contribution to the financial innovation literature by examining the diffusion of a recent important innovation of the 1990s: banks' use of credit scoring for small business lending. We examine the responses of 95 large banking organizations to a survey that asked whether they had adopted credit scoring for small business lending as of June 1997 (56 had done so) and, if they had adopted it, when they had done so. We estimate hazard and tobit models to explain the diffusion pattern of small business credit scoring models. Explanatory variables include several market, firm, and managerial factors of the banking organizations' under study. The hazard model indicates that larger banking organizations innovated earlier, asdid those located in the New York Federal Reserve district; both results are consistent with our expectations. The tobit model confirms these results and also finds that organizations with fewer separately chartered banks but more branches innovated earlier, which is consistent with theories stressing the importance of bank organizational form on lending style. Though the managerial variables' signs are consistent with our expectations, none yields significant results.

Credit Scoring, Small Business Lending, Financial Innovation, Technology Diffusion

Abstract:
Financial innovation has been described as the life blood of efficient and responsive capital markets. Yet, few quantitative investigations have studied financial innovations and the diffusion of these new technologies. In this paper, we examine the diffusion of one such technology: credit scoring models for small business lending. Using data for large banking organizations, our hazard model indicates that banking firms with more branches innovate earlier, as do those located in the New York Federal Reserve district. Our Tobit model confirms these results and finds that organizations with fewer separately chartered banks but more branches innovate earlier.

Credit scoring, small business lending, financial innovation, technology diffusion

Abstract:
Financial innovation has been described as the "life blood of efficient and responsive capital markets." Yet, there have been few quantitative investigations of financial innovation and the diffusion of these new technologies. Of the latter, there have been only three prior quantitative studies, and all three used the same data set on automated teller machines!

This paper makes a significant contribution to the financial innovation literature by examining the diffusion of a recent important innovation of the 1990s: banks' use of credit scoring for small business lending. The authors examine the responses of 95 large banking organizations to a survey that asked whether they had adopted credit scoring for small business lending as of June 1997 (56 had done so) and, if they had adopted it, when they had done so. The authors estimate hazard and tobit models to explain the diffusion pattern of small business credit scoring models. Explanatory variables include several market, firm, and managerial factors of the banking organizations under study.

The hazard model indicates that larger banking organizations introduced innovation earlier, as did those located in the New York Federal Reserve district; both results are consistent with expectations. The tobit model confirms these results and also finds that organizations with fewer separately chartered banks but more branches introduced innovation earlier, which is consistent with theories stressing the importance of bank organizational form on lending style. Though the managerial variables signs are consistent with our expectations, none yields significant results.

Credit scoring, small business lending, financial innovation, technology diffusion

Abstract:
Over the past two to three decades economics has played an increasingly important role in the development of U.S. antitrust enforcement and policy. This essay first reviews the major facets of U.S. antitrust enforcement and next reviews the ways in which economics -- starting from a low base -- has grown in importance in antitrust. The essay then highlights three antitrust areas in whichthe influence of economics has had the greatest influence: merger analysis, vertical relationships, and predatory pricing. The essay concludes with the identification of four antitrust areas where further economics analysis could have high returns.

Antitrust, industrial organization, merger analysis, vertical relationships

Abstract:
Over the past two to three decades economics has played an increasingly important role in the development of U.S. antitrust enforcement and policy. This essay first reviews the major facets of U.S. antitrust enforcement and next reviews the ways in which economics - starting from a low base - has grown in importance in antitrust. The essay then highlights three antitrust areas in which the influence of economics has had the greatest influence: merger analysis, vertical relationships, and predatory pricing. The essay concludes with the identification of four antitrust areas where further economics analysis could have high returns.

Antitrust; industrial organization; merger analysis; vertical relationships

Abstract:
This paper reviews the extant empirical studies of financial innovation. Adopting broad criteria, we found just two-dozen studies (24), over half of which (14) had been conducted since 2000. Since some financial innovations are examined by more than one study, only 14 distinct phenomena have been covered. Especially striking is the fact that only two studies are directed at the hypotheses advanced in many broad descriptive articles concerning the environmental conditions (e.g., regulation, taxes, unstable macroeconomic conditions, and ripe technologies) spurring financial innovation. We offer some tentative conjectures as to why empirical studies of financial innovation are comparatively rare. Among our suggested culprits is an absence of accessible data. We urge financial regulators to undertake more surveys of financial innovation and to make the survey data more available to researchers.

Financial innovation, banking, securities, patents

Abstract:
This paper reviews the extant empirical studies of financial innovation. Adopting broad criteria, the authors found just two dozen studies, over half of which (fourteen) had been conducted since 2000. Since some financial innovations are examined by more than one study, only fourteen distinct phenomena have been covered. Especially striking is the fact that only two studies are directed at the hypotheses advanced in many broad descriptive articles concerning the environmental conditions (e.g., regulation, taxes, unstable macroeconomic conditions, and ripe technologies) spurring financial innovation. The authors offer some tentative conjectures as to why empirical studies of financial innovation are comparatively rare. Among their suggested culprits is an absence of accessible data. The authors urge financial regulators to undertake more surveys of financial innovation and to make the survey data more available to researchers.

financial innovation, banking, securities, patents

Abstract:
Industries that have important network features have long been a concern of public policy in the United States. This paper provides a framework for analyzing network industries and reviews the regulatory and antitrust history of the policies that have been applied. The paper highlights the successes of the deregulation limitations to the extent to which deregulation can proceed. The paper notes that antitrust will and should become more important for adjudicating disputes as formal regulation recedes but that an important concept for the antitrust treatment of network industries ? the "essential facilities doctrine" -- is badly in need of clarification.

Abstract:
The informational opacity of small businesses makes them an interesting area for the study of banks' lending practices and procedures. We use a survey of small businesses conducted by the Federal Reserve to analyze the micro-level differences between large banks and small banks in the loan approval process. We provide evidence that large banks ($1 billion or more in assets) tend to employ standard criteria obtained from financial statements in the loan decision process, but that small banks (less than $1 billion in assets) deviate from these criteria by relying to a larger extent on the character of the borrower. Some of the results are inconsistent, however. These "cookie-cutter" and "character" approaches are compatible with the incentives and environments facing large and small banks.

Small business lending, Banks, Relationship banking, and Size of bank

Abstract:
As economists, we believe that the Second Circuit's ruling, by not allowing the consideration of important information about the relationships between the benefits and costs of alternatives, is economically unsound. In particular, we believe that, as a general principle, regulators cannot make rational decisions unless they are allowed to compare costs and benefits and to use the results, along with other factors as appropriate, to choose among alternatives.

To the extent permissible under the statute and case law, EPA should be allowed to consider benefits and costs in establishing rules for implementing s316(b). The Court's allowing EPA to consider benefits and costs would improve both the decision making process - by making it more transparent - and the regulatory decisions by allowing important relevant information to be considered explicitly.

Abstract:
We study the effects of structural changes in banking markets on the supply of credit to small businesses. Specifically, we examine whether bank mergers and acquisitions (M&As) and entry have "external" effects on small business loans by other banks in the same local markets. The results suggest modest positive external effects from these dynamic changes in competition, except that large banks may reduce small business lending in reaction to entry. We confirm bank size and age as important determinants of this lending, and show that the measured age effect does not appear to be driven bylocal market M&A activity.

Bank, Mergers, Small Business

Abstract:
We study the effects of structural changes in banking markets on the supply of credit to small businesses. Specifically, we examine whether bank mergers and acquisitions (M&As) and entry have "external" effects on small business loans by other banks in the same local markets. The results suggest modest positive external effects from these dynamic changes in competition, except that large banks may reduce small business lending in reaction to entry. We confirm bank size and age as important determinants of this lending, and show that the measured age effect does not appear to be driven by local market M&A activity.

Bank, mergers, small business

Abstract:
We study the effects of structural changes in banking markets on the supply of credit to small businesses. Specifically, we examine whether bank mergers and acquisitions (M&As) and entry have "external" effects on small business loans by other banks in the same local markets. The results suggest modest positive external effects from these dynamic changes in competition, except that large banks may reduce small business lending in reaction to entry. We confirm bank size and age as important determinants of this lending, and show that the measured age effect does not appear to be driven by local market M&A activity.

Bank, mergers, small business

Abstract:
The merger of the Union Pacific and Southern Pacific Railroads was proposed in August 1995 and received regulatory approval in July 1996. From its proposal onward, the merger has sparked considerable controversy. This paper reviews the background to the merger, the arguments that were set forth by the merger?s proponents and opponents, the eventual decision by the U.S. Surface Transportation Board, and the difficulties that have beset the merged firm since 1996.

Abstract:
Accounting has been a lead sector in the General Agreement on Trade in Services (GATS)negotiations to reduce barriers to trade in professional services. This is no accident. Accounting already has a substantial international component; the largest accounting firms have major international presences and have been eager to operate in less restrictive environments. Accountingis coming to be understood as a vital infrastructural element of financial services, and as finance becomes more global, accounting too should become more global. Similarly, as large businesses enterprises generally have become more international, their need for more international accountingservices has grown. But, despite the considerable international presences of the major accounting firms, virtually all countries maintain various types of restrictions that impede the flow ofaccounting services across borders. The consequences have been higher costs, poorer service to clients, and reduced efficiency, as well as lower quality accounting/auditing standards in many countries. Substantial progress can and should be made to reduce the current barriers to freer trade in accounting services.

Abstract:
Accounting has been a lead sector in the General Agreement on Trade in Services (GATS) negotiations to reduce barriers to trade in professional services. This is no accident. Accounting already has a substantial international component; the largest accounting firms have major international presences and have been eager to operate in less restrictive environments. Accounting is coming to be understood as a vital infrastructural element of financial services, and as finance becomes more global, accounting too should become more global. Similarly, as large businesses enterprises generally have become more international, their need for more international accounting services has grown. But, despite the considerable international presences of the major accounting firms, virtually all countries maintain various types of restrictions that impede the flow of accounting services across borders. The consequences have been higher costs, poorer service to clients, and reduced efficiency, as well as lower quality accounting/auditing standards in many countries. Substantial progress can and should be made to reduce the current barriers to freer trade in accounting services.

Abstract:
The extent and structure of non-banking activities for commercial banks has been a long-standing policy concern for the United States. Recently, three alternative models for the undertaking of non-traditional activities -- the universal bank, the separate subsidiary of the holding company, and the operating subsidiary of the bank -- have come to the fore. After reviewing the history of activity restrictions on banks and providing an analytical framework for considering the appropriate structure, we conclude that the "op sub" approach has modest advantages, but that even it carries substantial risks and requires vigorous monitoring and enforcement.

Abstract:
This paper critiques some of the properties of the so-called "efficient component pricing rule" (ECPR) for access to a bottleneck (monopoly) facility. When a rival and the bottleneck monopolist both produce a complementary component to the bottleneck service, the ECPR specifies that the access fee paid by the rival to the monopolist should be equal to the monopolist's opportunity costs of providing access, including any forgone revenues from a concomitant reduction in the monopolist's sales of the complementary component. We focus especially on the case in which the monopolist's price for the complementary component is above all relevant marginal costs. In this case the ECPR's exclusion of rivals may be socially harmful, since it may be preventing a substantial decrease in the price of the complementary component.

Abstract:
The roles of Fannie Mae and Freddie Mac have become increasingly controversial in the modern world of residential mortgage finance. We describe the special features of these two companies and their roles in the mortgage markets. We then discuss the controversies that surround them and offer recommendations for improvements in public policy.

Fannie Mae, Freddie Mac, government-sponsored enterprises, residential mortgages, securitization, regulation

Abstract:
The DOJ-FTC Merger Guidelines were developed for and best deal with horizontal mergers where the theory of harm is "coordinated effects". The Guidelines deal awkwardly, at best, with mergers where the theory of harm is "unilateral effects". The broad body of evidence - from profitability studies, from pricing studies, and from auction studies - indicates that seller concentration matters. But these studies do not provide adequate guidance as to whether current antitrust enforcement is too strict or too lenient with respect to mergers. Research on the consequences of the "close call" mergers that were not challenged might well provide such guidance, as might a "meta analysis" of the extant price-concentration studies. New procedures are needed for inquiry and enforcement where the theory of harm is "unilateral effects", as is a market definition paradigm for monopolization cases.

Antitrust, Merger Enforcement, Merger Guidelines, Coordinated Effects, Unilateral Effects

Abstract:
The DOJ-FTC Merger Guidelines were developed for and best deal with horizontal mergers where the theory of harm is coordinated effects. The Guidelines deal awkwardly, at best, with mergers where the theory of harm is unilateral effects. The broad body of evidence - from profitability studies, from pricing studies, and from auction studies - indicates that seller concentration matters. But these studies do not provide adequate guidance as to whether current antitrust enforcement is too strict or too lenient with respect to mergers. Research on the consequences of the close call mergers that were not challenged might well provide such guidance, as might a meta analysis of the extant price-concentration studies. New procedures are needed for inquiry and enforcement where the theory of harm is unilateral effects, as is a market definition paradigm for monopolization cases.

Antitrust, Merger Enforcement, Merger Guidelines, Coordinated Effects, Unilateral Effects

Abstract:
We offer and test two competing hypotheses for the consolidation trend in banking using U.S. banking industry data over the period 1982-2000. Under the efficiency hypothesis, technological progress improved the performance of large, multimarket firms relative to small, single-market firms, whereas under the hubris hypothesis, consolidation was largely driven by corporate hubris. Our results are consistent with an empirical dominance of the efficiency hypothesis over the hubris hypothesis on net, technological progress allowed large, multimarket banks to compete more effectively against small, single-market banks in the 1990s than in the 1980s. We also isolate the extent to which technological progress occurred through scale versus geographic effects and how they affected the performance of small, single-market banks through revenues versus costs. The results may shedlight as well on some of the research and policy issues related to community banking, and on the question of how community banks should be defined.

Banks, Community Banking, Bank Size, Multimarket Banks, Technological Progress

Abstract:
We offer and test two competing hypotheses for the consolidation trend in banking using U.S. banking industry data over the period 1982-2000. Under the efficiency hypothesis, technological progress improved the performance of large, multimarket firms relative to small, single-market firms, whereas under the hubris hypothesis, consolidation was largely driven by corporate hubris. Our results are consistent with an empirical dominance of the efficiency hypothesis over the hubris hypothesis - on net, technological progress allowed large, multimarket banks to compete more effectively against small, single-market banks in the 1990s than in the 1980s. We also isolate the extent to which technological progress occurred through scale versus geographic effects and how they affected the performance of small, single-market banks through revenues versus costs. The results may shed light as well on some of the research and policy issues related to community banking, and on the question of how community banks should be defined.

Banks, Community Banking, Bank Size, Multimarket Banks, Technological Progress

Abstract:
This essay discusses the role that competition policy can play in promoting economic growth. The essay begins by outlining the main components of modern antitrust policy. The essay then discusses the major aspects of an economy that contribute to economic growth and shows theways that competition policy can favorably influence economic growth. Next the essay discusses "industrial policy", as a set of policies that are in contradiction to competition policy and describes the tensions between them. Finally, the paper discusses the role of economics and economists in thedevelopment of competition policy in the U.S. and highlights some major advances in U.S.competition policy (to which economics and economists have contributed), which have madecompetition policy more consonant with economic efficiency (and economic growth); in addition, some potential improvements that could promote the effectiveness of competition policy even further are proposed.

Competition policy, antitrust, economic growth, industrial policy, regulation

Abstract:
This essay discusses the role that competition policy can play in promoting economic growth. The essay begins by outlining the main components of modern antitrust policy. The essay then discusses the major aspects of an economy that contribute to economic growth and shows the ways that competition policy can favorably influence economic growth. Next the essay discusses industrial policy, as a set of policies that are in contradiction to competition policy and describes the tensions between them. Finally, the paper discusses the role of economics and economists in the development of competition policy in the U.S. and highlights some major advances in U.S. competition policy (to which economics and economists have contributed), which have made competition policy more consonant with economic efficiency (and economic growth); in addition, some potential improvements that could promote the effectiveness of competition policy even further are proposed.

Abstract:
The accounting scandal at Freddie Mac and increased interest rate risk exposure at Fannie Mae generated considerable headlines for the two giant housing GSEs over the past two years. Less widely recognized are two emerging and potentially powerful sources of new competition for Fannie Mae and Freddie Mac: an expanded mortgage finance program by the Federal Home Loan Bank System and new bank risk-based capital standards that are likely to be implemented in 2006. This heightened competition could create incentives for Fannie Mae and Freddie Mac to take greater risks, with potentially unfavorable consequences for U.S. taxpayers. As a result, unless the two firms were to be privatized quickly (which is highly unlikely), enhanced regulatory scrutiny will be in order.

Fannie Mae, Freddie Mac, banking, finance, mortgage-backed securities, government sponsored enterprises, GSE, competition, regulation, reform

Abstract:
In October 1996 the Archer Daniels Midland Company (ADM) pled guilty to criminal pricefixing with respect to sales of lysine and agreed to pay a $70 million fine. Earlier, in August 1996 two Japanese producers and a Korean producer of lysine had agreed to plead guilty to criminal price fixing charges. And earlier still, in July 1996 ADM and the two Japanese companies settled the civil suitsfiled by some harmed buyers by agreeing to pay a sum of $45 million.It is this last event that serves as the focus for this paper. The adequacy of the settlement amount was a major area of dispute. Connor (1996, 1997, 1998) has claimed that the trebled damages to lysine purchasers were an order of magnitude larger. Crucial to Connor's conclusions are hisassumptions as to the time period during which the conspiracy had an effect on prices and the "but for" price that otherwise would have prevailed in the absence of the conspiracy. This paper will argue thatConnor substantially over-estimated the period of the conspiracy and under-estimated the "but-for" price.

antitrust, price-fixing, treble damages

Abstract:
In October 1996 the Archer Daniels Midland Company (ADM) pled guilty to criminal price fixing with respect to sales of lysine and agreed to pay a $70 million fine. Earlier, in August 1996 two Japanese producers and a Korean producer of lysine had agreed to plead guilty to criminal price fixing charges. And earlier still, in July 1996 ADM and the two Japanese companies settled the civil suits filed by some harmed buyers by agreeing to pay a sum of $45 million.

It is this last event that serves as the focus for this paper. The adequacy of the settlement amount was a major area of dispute. Connor (1996, 1997, 1998) has claimed that the trebled damages to lysine purchasers were an order of magnitude larger. Crucial to Connor's conclusions are his assumptions as to the time period during which the conspiracy had an effect on prices and the "but for" price that otherwise would have prevailed in the absence of the conspiracy. This paper will argue that Connor substantially over-estimated the period of the conspiracy and under-estimated the "but-for" price.

Abstract:
In October 1996 the Archer Daniels Midland Company (ADM) pled guilty to criminal price fixing with respect to sales of lysine and agreed to pay a $70 million fine. Earlier, in August 1996 two Japanese producers and a Korean producer of lysine had agreed to plead guilty to criminal price fixing charges. And earlier still, in July 1996 ADM and the two Japanese companies settled the civil suits filed by some harmed buyers by agreeing to pay a sum of $45 million.

It is this last event that serves as the focus for this paper. The adequacy of the settlement amount was a major area of dispute. Connor (1996, 1997, 1998) has claimed that the trebled damages to lysine purchasers were an order of magnitude larger. Crucial to Connor's conclusions are his assumptions as to the time period during which the conspiracy had an effect on prices and the "but for" price that otherwise would have prevailed in the absence of the conspiracy. This paper will argue that Connor substantially over-estimated the period of the conspiracy and under-estimated the "but-for" price.

Abstract:
Antitrust and regulatory concerns continue to swirl around the payment cards industry, for understandable reasons: The industry is clearly not atomistic in structure; it has substantial network characteristics and thus embodies network externalities; it involves two-sided markets; and its two most prominent members - Visa and MasterCard - are network joint ventures of the banks that issue credit and debit cards to individual cardholders and that enroll (acquire) and service the merchants who accept those cards.

These characteristics raise the possibility that the industry may not be fully competitive - that market power may currently be present and/or may prospectively be created or enhanced as a consequence of a merger - and thus raise potential policy concerns. But these same characteristics also cloud the standard against which the performance of the industry should be judged. And they complicate the analysis that is necessary to form judgments.

This essay attempts to clarify some of these issues while exploring the same themes as does Emch and Thompson (2006): market definition, market power, and payment card networks.

Antitrust, regulation, market definition, market power, mergers, monopolization, payment networks

Abstract:
With little fanfare last September, President Bush signed the Credit Rating Agency Reform Act of 2006. This new legislation has the potential to change the way that the credit rating industry is regulated by the Securities and Exchange Commission. So as to provide a better understanding of the significance of the new law, this paper first provides a brief recounting of the bond rating industry's history and the SEC's haphazard regulation of this industry over the past 31 years. The paper then outlines the important provisions of the new act and comments on the possible routes that the SEC could follow in implementing it.

Securities and Exchange Commission, entry regulation, bond rating industry, nationally recognized statistical rating organizations

Abstract:
Delaware courts largely have privatized enforcement of fiduciary duties in public corporations and have expressly acknowledged this judicial policy. The Delaware courts also recognize that so encouraging private enforcement creates an obvious danger: Plaintiffs' attorneys, especially in class actions where there is no strongly interested plaintiff, may make litigation-related decisions primarily with a view to advancing their own economic interests, rather than advancing the interests of the corporation or shareholders that they purport to represent. Such decisions have the potential to impose substantial, litigation-related agency costs on corporations, shareholders and the courts, if not appropriately curbed through judicial monitoring of settlements and fee awards.

This paper examines the development of Delaware law with respect to merger-related class actions, which have become the dominant form of shareholder litigation in Delaware. We offer two broad alternative hypotheses as to what drives merger-related class actions in Delaware: a "shareholder champion" hypothesis, and a "self-interested litigator" hypothesis. We then examine intensively all large mergers in 1999-2001 where the target was a publicly traded Delaware company, and all class actions filed with respect to those mergers. We conduct statistical analyses as well as a detailed qualitative analysis of the 104 class actions filed during those years.

The pattern that we observe is redolent of a pattern of opportunistic filings, of a lawyer-driven process rather than a true client-driven process: systematic behavior with respect to which mergers were challenged; early and frequent complaints filed; a very high percentage of dismissed cases never reached a judgment on the merits; the absence of a single case that has been decided in favor of the plaintiffs on the merits; settlements tending to reflect free riding by plaintiffs' attorneys; plaintiffs' attorneys failing to challenge special negotiating committees' decisions or competing offers; attorneys with "real" clients and from outside the "traditional" Delaware plaintiffs' bar who were far more vigorous in their litigation efforts; no settlements overturned by the Delaware courts; plaintiffs' attorneys' fee awards in settlements usually paid by defendants and not out of common funds, and largely unchallenged; and plaintiffs' attorneys' fees representing a strikingly low percentage of claimed recoveries (but attractive on an hourly basis), which may well indicate that the attorneys added little value to the recoveries.

We then offer suggestions as to changes in pleading standards and the Delaware courts' approach to reviewing settlements and plaintiffs' attorneys' fees that would help curb the excesses of class action litigation without seriously undermining the constructive role that plaintiffs' attorneys have the potential to play in policing corporate mis-governance with respect to mergers.

Delaware law, class actions, mergers, agency costs

Abstract:
An injured party can sometimes identify the class of product that injured her, but not the particular firm that was the source of harm. One possible approach to liability is a rule based on the market shares of the firms. Some commentators have argued that this approach violates the identification requirement and rarely yields efficient incentives for the reduction of harm; their favored alternative apparently is to impose no liability on defendants. While we agree that market share liability will only rarely yield the perfectly efficient solution, a standard of perfect efficiency is unrealistic, since most situations where market share liability is proposed are ones of imperfect information and thus where a perfectly efficient remedy is unobtainable. We compare the efficiency of the market share liability approach to two alternatives: no liability (i.e., victim liability), and multiple joint and several with no contribution that is, placing 100% of the industry's liability on each defendant. We argue that efficiency often dictates increasing liability from the market-share standard, rather than reducing it to zero.

Abstract:
The early 1980s were an important time of transition for antitrust policy for the Antitrust Division of the U.S. Department of Justice. I had the privilege to be selected to serve as the first "Chief Economist" for the newly installed Assistant Attorney General for Antitrust, William F. Baxter. In this essay I discuss some of the important achievements of that period, as well as some missed opportunities.

Antitrust, mergers; price-fixing, monopolization

Abstract:
The early 1980s were an important time of transition for antitrust policy for the Antitrust Division of the U.S. Department of Justice. I had the privilege to be selected to serve as the first "Chief Economist" for the newly installed Assistant Attorney General for Antitrust, William F. Baxter. In this essay I discuss some of the important achievements of that period, as well as some missed opportunities.

Abstract:
The early 1980s were an important time of transition for antitrust policy for the Antitrust Division of the U.S. Department of Justice. I had the privilege to be selected to serve as the first "Chief Economist" for the newly installed Assistant Attorney General for Antitrust, William F. Baxter. In this essay I discuss some of the important achievements of that period, as well as some missed opportunities.

Abstract:
This paper examines two major forces that may soon increase competition in the U.S. secondary conforming mortgage market: (1) the expansion of Federal Home Loan Bank mortgage purchase programs and (2) the adoption of revised risk-based capital requirements for large U.S. banks (Basel II). The authors argue that this competition is likely to reduce the growth and relative importance of Fannie Mae and Freddie Mac and hence their franchise values and effective capital. Such developments could, in turn, lead to more risky behaviors by these two GSEs. It is this last consequence that warrants greater regulatory awareness.

Government-sponsored enterprises, mortgages, securitization, risk-based capital, moral hazard, charter value

Abstract:
This paper discusses the SEC's regulation of the bond rating industry. Until a few years ago this specific branch of SEC regulation was largely unknown outside the agency and the bond rating industry itself, even among knowledgeable Washington insiders. But the SEC has actually regulated the industry since 1975: by limiting entry, in an indirect but powerful way. As a consequence, incumbent bond rating firms are protected; potential entrants are impeded; and new ideas and technologies for assessing the riskiness of debt, and thereby the allocation of capital, may well be stifled. This entry regulation is an excellent example of good intentions having gone awry, via the law of unintended consequences. The good intentions were to improve the safety-and-soundness regulation of financial institutions, and even to use market information to do so. But the unfortunate result has been a distortionary entry restriction regime with respect to bond rating firms. Fortunately, there are better ways to achieve the desired goals - ways that would permit the SEC to cease these entry restrictions and nevertheless allow safety-and-soundness regulation of financial institutions to proceed in desirable directions. If the SEC were to exit from its role as the entry regulator of the bond rating industry, financial markets' participants could then make their own decisions as to which firms and methods offer the best information as to the default probabilities and other relevant parameters with respect to debt issuances. This paper expands on these themes.

Securities and Exchange Commission, entry regulation, bond rating industry, nationally recognized statistical rating organizations

Abstract:
This paper discusses the SEC's regulation of the bond rating industry. Until a few years ago this specific branch of SEC regulation was largely unknown outside the agency and the bond rating industry itself, even among knowledgeable Washington insiders. But the SEC has actually regulated the industry since 1975: by limiting entry, in an indirect but powerful way. As a consequence, incumbent bond rating firms are protected; potential entrants are impeded; and new ideas and technologies for assessing the riskiness of debt, and thereby the allocation of capital, may well be stifled.

This entry regulation is an excellent example of good intentions having gone awry, via the law of unintended consequences. The good intentions were to improve the safety-and-soundness regulation of financial institutions, and even to use market information to do so. But the unfortunate result has been a distortionary entry restriction regime with respect to bond rating firms.

Fortunately, there are better ways to achieve the desired goals - ways that would permit the SEC to cease these entry restrictions and nevertheless allow safety-and-soundness regulation of financial institutions to proceed in desirable directions. If the SEC were to exit from its role as the entry regulator of the bond rating industry, financial markets' participants could then make their own decisions as to which firms and methods offer the best information as to the default probabilities and other relevant parameters with respect to debt issuances.

This paper expands on these themes.

Securities and Exchange Commission, entry regulation, bond rating industry, nationally recognized statistical rating organizations

Abstract:
This paper discusses the tensions between antitrust policy and industrial policy from a U.S. perspective. In the late 1970s and the 1980s, in the wake of the slowdown of the U.S. economy and the apparent ascendancy of the Japanese economy, the pluses and minuses of a formal industrial policy were debated in the U.S.; but there was never an explicit adoption of anything that had the appearance of a formal industrial policy. Nevertheless, there is a long tradition of governmental intervention in the U.S. that is at odds with the spirit and letter of antitrust policy's pursuit of more competitive and efficient markets.

After offering definitions of antitrust and of industrial policy, this paper offers details on the types of governmental intervention that are at odds with antitrust. It then provides some reflections on the reasons for these tensions and conflicts.

Abstract:
The question of market definition for monopolization cases - and thus the issue of the possession of market power by the defendant - is crucial for the outcome of these cases. However, unlike antitrust merger analysis, where the DOJ-FTC Horizontal Merger Guidelines has provided a successful paradigm for market definition, monopolization cases lack a guiding market definition paradigm. This chapter addresses this issue, shows the problems that arise when a market definition paradigm is absent, and offers some partial remedies. The best remedy, though, would be the development of a suitable market definition paradigm for these cases.

Abstract:
The three major credit rating agencies -- Moody's, Standard & Poor's, and Fitch -- played a central role in the subprime mortgage debacle of 2007-2008. That centrality was not accidental. Seven decades of financial regulation propelled these rating agencies into the center of the bond information market, by elevating their judgments about the creditworthiness of bonds so that those judgments attained the force of law. The Securities and Exchange Commission exacerbated this problem by erecting a barrier to entry into the credit rating business in 1975. Understanding this history is crucial for any reasoned debate about the future course of public policy with respect to the rating agencies.

credit rating agencies, nationally recognized statistical rating agency (NRSRO), Securities and Exchange Commission (SEC), bond information market

Abstract:
With little fanfare last September, President Bush signed the Credit Rating Agency Reform Act of 2006, in an effort to open what had been a murky, government-sanctioned cartel of bond-rating firms. An optimist could argue that new law will make rater certification more transparent and open the business up to new competitors. A pessimist would respond that the law still gives tremendous power to government-ordained bond raters. Only the passage of time will tell who is correct.

Lawrence J. White, A New Law for the Bond Rating Industry, Credit Rating Agency Reform Act, rater certification, transparency, bonds, SEC, securities and investment, NRSRO designation system, ENRON, Sarbanes-Oxley, regulation,

Abstract:
In this paper I assemble and array two rarely used data sets to measure the extent of aggregate concentration -- the share of national economic activity accounted for by the largest X companies -- in the U.S. in the 1980s and 1990s. The data show clearly that, despite the substantial merger wave of the 1980s and the far larger wave of the 1990s, aggregate concentration declined in the 1980s and the early 1990s. Aggregate concentration increased after the mid 1990s, but the levels at the end of the decade were still at or below the levels of the late 1980s or early 1990s. The average size of firm did increase, however, and the relative importance of the larger size classes of firms increased generally. Gini coefficients computed for employment shares and payroll shares of companies showed moderate but steady increases from 1988 through 1998. In the conclusion of the paper I offer some tentative hypotheses for explaining these patterns.

Key words: aggregate concentration; mergers; size distribution of firms

Abstract:
In this paper we examine the lending by small banks to small farms. We find that relationships, as measured by the length of tenure of farm operators, are positively related to bank lending. We also find that denovo banks have a positive tendency to lend to small farms, similar to the tendency of denovo banks to lend to small businesses generally. When existing relationships between borrowers and incumbent lenders are stronger, however, denovo banks have greater difficulties in lending to small farms. Finally, we find that, even within the category of small banks, lending to small farms (as a percentage of a bank's assets) tends to decrease as the bank increases in size. We believe that small farms are a category of small enterprises that have been under researched in the lending literature and that further study of these relationships would yield new and interesting results.

Banks, loans, lending relationships, denovo banks, agriculture, farms

Abstract:
In this paper we examine the lending by small banks to small farms. We find that relationships, as measured by the length of tenure of farm operators, are positively related to bank lending. We also find that denovo banks have a positive tendency to lend to small farms, similar to the tendency of denovo banks to lend to small businesses generally. When existing relationships between borrowers and incumbent lenders are stronger, however, denovo banks have greater difficulties in lending to small farms. Finally, we find that, even within the category of small banks, lending to small farms (as a percentage of a bank's assets) tends to decrease as the bank increases in size. We believe that small farms are a category of small enterprises that have been under-researched in the lending literature and that further study of these relationships would yield new and interesting results.

Banks, loans, lending relationships, denovo banks, agriculture, farms

Abstract:
The U.S. financial crisis of 2007-2008 has been a searing experience. The popping of a housing bubble exposed the subprime lending debacle, which in turn created a wider financial crisis. In its response to this crisis, the federal government has provided financial assistance to a number of financial institutions that are often described as 'too big to fail' (TBTF), which to those who associate antitrust with size, seems to bring antitrust potentially into the picture. This paper will offer a guide to the antitrust community that will cover the U.S. financial sector, financial regulation, and the debacle and subsequent financial crisis. The tensions that can arise between financial regulation and antitrust will be highlighted. TBTF is not one of them, however, because TBTF is about size and interconnectedness, but not about competition and market power. Although much progress has been made in removing anticompetitive elements from financial regulation over the past three to four decades, there are still important advances that can be made. The paper concludes by offering a set of policy recommendations for the removal of some of the important remaining elements of financial regulation that impede competition.

Antitrust, regulation, competition, too-big-to-fail

Abstract:
The U.S. financial crisis of 2007-2008 has been a searing experience. The popping of a housing bubble exposed the subprime lending debacle, which in turn created a wider financial crisis. In its response to this crisis, the federal government has provided financial assistance to a number of financial institutions that are often described as 'too big to fail' (TBTF) – which, to those who associate antitrust with size, seems to bring antitrust potentially into the picture. This paper will offer a guide to the antitrust community that will cover the U.S. financial sector, financial regulation, and the debacle and subsequent financial crisis. The tensions that can arise between financial regulation and antitrust will be highlighted. TBTF is not one of them, however, because TBTF is about size and interconnectedness, but not about competition and market power. Although much progress has been made in removing anticompetitive elements from financial regulation over the past three to four decades, there are still important advances that can be made. The paper concludes by offering a set of policy recommendations for the removal of some of the important remaining elements of financial regulation that impede competition.

competition, antitrust, housing crisis, too big to fail, financial regulation

Abstract:
The residential real estate brokerage industry represents a troubling instance of false appearances. Though the numbers of sales agents and brokerage firms, plus easy entry, would appear to offer the promise of vigorous competition, actual practices in the industry have caused reality to fall substantially short of the potential. After recounting the history of the transition of the securities industry from fixed and non-competitive stock brokerage commissions to far more vigorous competition, I draw on that experience to describe what vigorous competition in the residential real estate brokerage industry would look like. I also suggest public policy measures that would help bring about more vigorous competition.

Residential real estate, brokerage, commissions, competition, multiple listing service

Abstract:
The residential real estate brokerage industry represents a troubling instance of false appearances. Though the numbers of sales agents and brokerage firms, plus easy entry, would appear to offer the promise of vigorous competition, actual practices in the industry have caused reality to fall substantially short of the potential. After recounting the history of the transition of the securities industry from fixed and non-competitive stock brokerage commissions to far more vigorous competition, I draw on that experience to describe what vigorous competition in the residential real estate brokerage industry would look like. I also suggest public policy measures that would help bring about more vigorous competition.

Abstract:
The application in July 2005 by Wal-Mart to obtain a specialized bank charter from the state of Utah and to obtain federal deposit insurance re-opened a national debate concerning the separation of banking and commerce. Simultaneously, bank regulators were considering the possibility of allowing banks to enter the area of residential real estate brokerage, which is another facet of the same set of issues. Though Wal-Mart withdrew its application in March 2007, the issues and the debate continue. This paper offers a principles-based approach to these issues that begins with the recognition that banks are special and that safety-and-soundness regulation of banks is therefore warranted. Building on that recognition, the paper lays out the principle that the "examinability and supervisability" of an activity should determine if it should be undertaken by a bank or by a bank's owners. Even if an otherwise legitimate activity is not suitable for a bank, it should be allowed for a bank's owners (whether the owners are individuals or a holding company), so long as the financial transactions between the bank and its owners are closely monitored by bank regulators. The implications of this set of ideas for the Wal-Mart case, for real estate brokerage, and for banking and commerce generally are then discussed.

Wal-Mart, real estate brokerage, banking and commerce, safety-and-soundness regulation

Abstract:
The application in July 2005 by Wal-Mart to obtain a specialized bank charter from the state of Utah and to obtain federal deposit insurance re-opened a national debate concerning the separation of banking and commerce. Simultaneously, bank regulators were considering the possibility of allowing banks to enter the area of residential real estate brokerage, which is another facet of the same set of issues. Though Wal-Mart withdrew its application in March 2007, the issues and the debate continue. This paper offers a principles-based approach to these issues that begins with the recognition that banks are special and that safety-and-soundness regulation of banks is therefore warranted. Building on that recognition, the paper lays out the principle that the "examinability and supervisability" of an activity should determine if it should be undertaken by a bank or by a bank's owners. Even if an otherwise legitimate activity is not suitable for a bank, it should be allowed for a bank's owners (whether the owners are individuals or a holding company), so long as the financial transactions between the bank and its owners are closely monitored by bank regulators. The implications of this set of ideas for the Wal-Mart case, for real estate brokerage, and for banking and commerce generally are then discussed.

Abstract:
We extend the results of our article, "Access and Interconnection Pricing? How Efficient Is the 'Efficient Component Pricing Rule'?," Antitrust Bulletin (1995). In the presence of a monopolized essential input, we show that application of the Efficient Component Pricing Rule ("ECPR") in pricing this input to downstream competitors perpetuates monopoly distortions and high prices of final goods services. We show these results for various demand conditions, including conditions that are accepted to hold in the telecommunications sector. We also respond to various criticisms raised by A. Larson in "The Efficiency of the Efficient-Component-Pricing Rule: A Comment," Antitrust Bulletin, (this issue) (1998).

Abstract:
The introduction of mortgage-backed securities (MBS) as a channel for housing finance is a relatively recent event for the United States, having occurred less than three-and-a-half decades ago. This paper provides a brief overview of the MBS process in the U.S. The paper places the MBS process in the larger contexts of finance in general and housing finance in particular, discusses its special features and its advantages and disadvantages, addresses its special infrastructure requirements, and describes the historical and recent experiences in the U.S.

mortgage-backed securities, residential mortgages, housing finance, securitization

Abstract:
The introduction of mortgage-backed securities (MBS) as a channel for housing finance is a relatively recent event for the United States, having occurred less than three-and-a-half decades ago. This paper provides a brief overview of the MBS process in the U.S. The paper places the MBS process in the larger contexts of finance in general and housing finance in particular, discusses its special features and its advantages and disadvantages, addresses its special infrastructure requirements, and describes the historical and recent experiences in the U.S.

mortgage-backed securities, residential mortgages, housing finance, securitization

Abstract:
This article proposes an economic model of the incentive-access paradigm for copyright designed to correspond to the goal of maximizing societal welfare.

The article begins with a discussion on the foundations of copyright and the objectives of the Constitution's Copyright Clause. The article adopts the majority view that the Constitution mandates that the copyright regime is designed to optimize the positive welfare impacts from copyright protection. Under this view, similarly as antitrust protects competition, not competitors, the copyright regime should protect creativity, not creators. The result of this underlying policy objective is that the level of copyright propertization becomes a balancing test where Congress and the courts should set the extent of the rights granted in the Copyright Act to a level that maximizes the aggregate societal benefit from copyrightable subject matter.

After laying this legal foundation, the article analyses the strengths and weaknesses of some economic models presented in academic literature. The focus of this discussion is the model proposed by William M. Landes and Richard A. Posner, but also includes a scan of some of the other relevant academic models. The majority of the economic models that have been proposed for intellectual property are built around marginal unit cost analysis, and the article questions whether - especially in a digital environment - that analysis presents a valid basis for modeling. The article then proposes a microeconomic formulation of the incentive-access paradigm that captures the economic concepts needed for Congress and the courts to derive policy decisions that maximize societal welfare.

The article concludes with a discussion of an implicit real-world application of the model. In its recent report on so-called orphan works the Copyright Office proposes that copyright protection where the owner is unidentifiable is reduced to a liability rule. This is consistent with the model's conclusion that reducing access costs at the outer perimeters of copyright protection will result in a net increase in output, and thereby in a net societal gain. The article suggests that policymakers and courts should view changes to the level of copyright protection through the lens of the proposed model to ensure that the copyright regime evolves in a manner consistent with the utilitarian objectives of the Constitution.

Abstract:
The special status, large sizes, and recent rapid growth of Fannie Mae and Freddie Mac have created and/or contributed to a set of difficult policy problems that include: misguided and excessive subsidization of housing in the U.S.; the safety and soundness of the two companies; systemic risk; residential mortgage terms and structure; and the inherent efficiencies of the two companies. The two companies are embedded in a much larger web of policies that broadly and inefficiently encourage housing construction and consumption. The true privatization of the two companies is the best solution to the problems that specifically involve them and would constitute a good start toward correcting the excesses of American housing policy. This true privatization can be accomplished in a relatively clean and straightforward fashion.

Fannie Mae, Freddie Mac, government-sponsored enterprises, residential mortgages, securitization, privatization

Abstract:
This paper examines the effectiveness of multinational enterprises capital budgeting decisions as compared to the decisions of purely domestic enterprises. This is an important question because of multinationals role in allocating capital globally. Answering this question may also shed light on whether multinationals are indeed better managed than are purely domestic firms. We examine this question empirically using the deviation of a firm s estimated marginal Tobin s q from an appropriate benchmark as an indicator of effective resource allocation. We find that multinationals make more efficient capital budgeting decisions than do purely domestic firms. The result stems from multinational enterprises exercising greater restraint on over-investment, but is not due to looser liquidity constraints. In obtaining the result, we account for the impact of institutional ownership, managerial ownership, and managerial entrenchment. We also test whether multinationals greater capital budgeting efficiency might be due to their investment locations, since they might thereby be monitored by more agents and also may be more successful in resisting pressures from special interest groups and governments to adopt practices that are not consistent with firm value maximization. We do not find support for the monitoring and bargaining hypotheses. Our observations therefore suggest that multinationals may be intrinsically better managed firms than are purely domestic firms.

Abstract:
In this paper I present new and original evidence concerning global aggregate concentration. To my knowledge, this evidence constitutes the first systematic effort to measure global aggregate concentration. The data are available only for the years 1994-2001 and require some compromisesand approximations.For 2001, the largest 500 global companies' employment accounted for 1.60% of the worldlabor force, or 9.92% of OECD employment. These companies' profits amounted to 0.94% ofworld GDP or 4.16% of world gross domestic savings (GDS); their profits also amounted to 1.18% of OECD GDP or 5.62% of OECD gross national saving (GNS). Similar estimates are available for the largest 50 global companies.The time trends for 1994-2001 show a mixed picture. If employment is the basis for themeasurements, the largest 50 global companies accounted for a slightly decreasing share ofaggregate employment over time. If, instead, profits are the basis for the measurements, then the 50 largest companies accounted for an increasing share over these same years. But this latter trend is likely overstated and is unlikely to be sustained. Future years will yield more data that can be usedto check these trends and refine these measurements.

aggregate concentration, mergers, global

Abstract:
In this paper I present new and original evidence concerning global aggregate concentration. To my knowledge, this evidence constitutes the first systematic effort to measure global aggregate concentration. The data are available only for the years 1994-2001 and require some compromises and approximations.

For 2001, the largest 500 global companies' employment accounted for 1.60% of the world labor force, or 9.92% of OECD employment. These companies' profits amounted to 0.94% of world GDP or 4.16% of world gross domestic savings (GDS); their profits also amounted to 1.18% of OECD GDP or 5.62% of OECD gross national saving (GNS). Similar estimates are available for the largest 50 global companies.

The time trends for 1994-2001 show a mixed picture. If employment is the basis for the measurements, the largest 50 global companies accounted for a slightly decreasing share of aggregate employment over time. If, instead, profits are the basis for the measurements, then the 50 largest companies accounted for an increasing share over these same years. But this latter trend is likely overstated and is unlikely to be sustained. Future years will yield more data that can be used to check these trends and refine these measurements.

aggregate concentration, mergers, global

Abstract:
Open access, combined with modern technologies of fishing, has created serious problems of overfishing and threatens the sustainability of many U.S. fisheries. The common pool problem - the ocean version of the tragedy of the commons - is the root cause of the overfishing.

The major regulatory policies of the past few decades that have tried to address overfishing - restrictions on fishing methods and inputs (in essence, command and control regulation) - have largely been failures. Indeed, they have often perversely exacerbated fisheries' overfishing problems by encouraging fishing derbies or races for the fish.

Fisheries are not alone in facing a common pool problem. Other areas of the U.S. economy have confronted similar problems, and public policies have developed to deal with them. This paper discusses seven of these other areas: the use of the electromagnetic spectrum, the control of sulfur dioxide emissions by electric utilities, grazing on public lands, forest logging on public lands, oil-gas-coal extraction from public lands and offshore waters, hard rock mineral (metal) mining, and surface water usage.

Important lessons can be gleaned from the policies that have been developed in these other areas, and this paper applies those lessons to the design of U.S. fisheries policy.

Abstract:
This article tests several hypotheses concerning the failure of thrift institutions and the costs these failures imposed upon the thrift deposit insurance fund. The central hypothesis posits that thrift failures during the 1986-1989 period were largely a function of portfolio decisions made by thrift managers during the mid-1980s, which, in turn, were strongly influenced by the structural characteristics of these thrifts in the early 1980s. A sample of 1,654 healthy thrifts and 621 failed or soon-to-fail thrifts for which consistent official estimates of the cost of liquidation were available from the FSLIC is analyzed using a variation of the technique suggested by Heckman (1979) to correct for sample-selectivity bias. The results provide strong support for the central hypothesis, demonstrating that these portfolio choices and structural characteristics are strong determinants of the likelihood and cost of failure, and that the structural characteristics strongly influence the subsequent portfolio choices.

deregulation, failure, moral hazard, S&L, thrift

Abstract:
The financial debacle of '07-'08 clearly highlighted the need for reforms of financial regulation. This paper lays out an agenda for reform.

Abstract:
Though the U.S. economy is generally open with respect to international trade in services, there are some notable exceptions as well as some more subtle problems. This essay provides a brief primer on trade in services, examines recent world and U.S. data, and highlights the major trade barriers, the opportunities, and the policy dangers that lurk in the current political climate.

trade in services, barriers, regulation, GATS

Abstract:
This paper draws on the progress that has occurred in other areas of regulation - specifically, the cap-and-trade program to control SO2 emissions; spectrum auctions; and dedicated-access-privilege programs for fisheries - to suggest that financial regulation would benefit from an expanded focus on outputs and on markets.

Financial regulation, command-and-control, technology standards, performance standards, cap-and-trade, auctions, dedicated access privilege

Abstract:
With little fanfare last September, President Bush signed the Credit Rating Agency Reform Act of 2006. This new legislation has the potential to change the way that the credit rating industry is regulated by the Securities and Exchange Commission. So as to provide a better understanding of the significance of the new law, this paper first provides a brief recounting of the bond rating industry's history and the SEC's haphazard regulation of this industry over the past 31 years. The paper then outlines the important provisions of the new act and comments on the possible routes that the SEC could follow in implementing it.

Abstract:
The question of market definition for monopolization cases - and thus the issue of the possession of market power by the defendant - is crucial for the outcome of these cases. However, unlike antitrust merger analysis, where the DOJ-FTC Horizontal Merger Guidelines has provided a successful paradigm for market definition, monopolization cases lack a guiding market definition paradigm. This chapter addresses this issue, shows the problems that arise when a market definition paradigm is absent, and offers some partial remedies. The best remedy, though, would be the development of a suitable market definition paradigm for these cases.

Antitrust, monopolization, market definition

Abstract:
This paper discusses the technological change and financial innovation that commercial banking has experienced during the past twenty-five years. The paper first describes the role of the financial system in economies and how technological change and financial innovation can improve social welfare. We then survey the literature relating to several specific financial innovations, which we define as new products or services, production processes, or organizational forms. We find that the past quarter century has been a period of substantial change in terms of banking products, services, and production technologies. Moreover, while much effort has been devoted to understanding the characteristics of users and adopters of financial innovations and the attendant welfare implications, we still know little about how and why financial innovations are initially developed.

technological change, financial innovation, banking

Abstract:
Although there is agreement on the basic economic principles that should apply to monopolization cases, there is no widely accepted paradigm for market definition or the identification of market power in such cases. This contrasts with the SSNIP paradigm of the DOJ-FTC Horizontal Merger Guidelines, which has gained wide acceptance in the two decades since its introduction. Moreover, misguided notions of market definition in monopolization cases still fall into a repeat commission of the â¬Scellophane fallacyâ¬? of U.S. v. du Pont (1956).To correct this problem, we propose asking the following question in monopolization cases where exclusionary practices are alleged: Would preservation of the allegedly foreclosed competitor or group of competitors have led to a small but significant nontransitory decrease in price (SSNDP) by the defendant? This SSNDP test can help define the relevant market and, more importantly, can allow courts to focus directly on the anticompetitive effects of the defendantâ¬"s actions and thereby on the exercise of market power.

antitrust, monopolization, exclusionary practices, market definition

Abstract:
This paper addresses the disclosure issues for financial conglomerates principally from the same perspective as that of the Basel Committee on Banking Supervision: that disclosure is important for the safety and soundness of banks. However, we reach substantially different conclusions with respect to three important disclosure issues: the role of market value accounting; the frequency of disclosures; and the role of subordinated debt.We start by asking why any special disclosure might be required for financial conglomerates. This question immediately leads to a discussion of what is special about financial conglomerates. We also address the question of, "Disclosure to whom?" There are at least two potential audiences for information disclosures: financial regulators; and the publicinvestors/creditors/customers of a financial conglomerate. Issues of the appropriate structure for a financial conglomerate, and the information revelation that should accompany that structure, are also raised. Finally, we return to the title topic: What constitutes appropriate disclosure for afinancial conglomerate. Unfortunately, by turning its back on the three most important steps that could be taken to improve information disclosure -- mandating market value accounting (MVA) for banks' reports to regulators, aiming toward daily submission of these reports, and requiring the issuance of subordinated debt -- the Basel Committee has fundamentally undermined its efforts to enhancebanks' safety and soundness.

Banks, Disclosure, Regulation, Basel II, Market Value Accounting, Subordinated Debt

Abstract:
This paper addresses the disclosure issues for financial conglomerates principally from the same perspective as that of the Basel Committee on Banking Supervision: that disclosure is important for the safety and soundness of banks. However, we reach substantially different conclusions with respect to three important disclosure issues: the role of market value accounting; the frequency of disclosures; and the role of subordinated debt.We start by asking why any special disclosure might be required for financial conglomerates. This question immediately leads to a discussion of what is special about financial conglomerates. We also address the question of, "Disclosure to whom?" There are at least two potential audiences for information disclosures: financial regulators; and the publicinvestors/creditors/customers of a financial conglomerate. Issues of the appropriate structure for a financial conglomerate, and the information revelation that should accompany that structure, are also raised. Finally, we return to the title topic: What constitutes appropriate disclosure for afinancial conglomerate.Unfortunately, by turning its back on the three most important steps that could be taken to improve information disclosure mandating market value accounting (MVA) for banks' reports to regulators, aiming toward daily submission of these reports, and requiring the issuance of subordinated debt the Basel Committee has fundamentally undermined its efforts to enhancebanks' safety and soundness.

Banks, Disclosure, Regulation, Basel II, Market Value Accounting, Subordinated Debt

Abstract:
he Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) are the two dominant entities in the secondary market for residential mortgages in the United States. This chapter describes and discusses these two companies and their special status in the U.S. residential mortgage market and recommends their true privatization, as well as a set of additional reform measures that would improve the efficiency of housing construction and consumption in the U.S. economy. Along the way, we will address a number of major issues that concern housing and its special place in the political landscape of America.

Fannie Mae, Freddie Mac, government-sponsored enterprises, housing, residential mortgages, securitization, regulation

Abstract:
Despite two decades of extensive deregulation, banks in the United States remain among the most heavily regulated entities in the U.S. economy. Partly, banks remain a prominent target for American populism and its political manifestations; but also important is the general recognitionthat one specific category of bank regulation safety-and-soundness (prudential) regulation is a crucial element in preserving the stability of the banking system and contributing to the health of the U.S. economy. This paper expands on that theme and discusses the important lessons and insights that can be gained from the experiences of the banking sector and of safety-and-soundness regulation during the past two decades.

Abstract:
The Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) are the two dominant entities in the secondary market for residential mortgages in the United States. This chapter describes and discusses these two companies and their special status in the U.S. residential mortgage market and recommends their true privatization, as well as a set of additional reform measures that would improve the efficiency of housing construction and consumption in the U.S. economy. Along the way, we will address a number of major issues that concern housing and its special place in the political landscape of America.

Fannie Mae, Freddie Mac, government-sponsored enterprises, housing, residential mortgages, securitization, regulation

Abstract:
This paper examines two major forces that may soon increase competition in the U.S. secondary conforming mortgage market: 1) the expansion of Federal Home Loan Bank mortgage purchase programs, and 2) the adoption of revised risk-based capital requirements for large U.S. banks (Basel II). We argue that this competition is likely to reduce the growth and relative importance of Fannie Mae and Freddie Mac and hence their franchise values and effective capital. Such developments could, in turn, lead to more risky behaviors by these two GSEs. It is this last consequence that warrants greater regulatory awareness.

Government-sponsored enterprises, mortgages, securitization, risk-based capital, moral hazard, charter value

Abstract:
This paper examines two major forces that may soon increase competition in the U.S. secondary conforming mortgage market: 1) the expansion of Federal Home Loan Bank mortgage purchase programs, and 2) the adoption of revised risk-based capital requirements for large U.S. banks (Basel II). We argue that this competition is likely to reduce the growth and relative importance of Fannie Mae and Freddie Mac and hence their franchise values and effective capital. Such developments could, in turn, lead to more risky behaviors by these two GSEs. It is this last consequence that warrants greater regulatory awareness.

Government-sponsored enterprises, mortgages, securitization, risk-based capital, moral hazard, charter value

Abstract:
This paper examines the wealth effects of financial-institution strategic alliances on the shareholders of the newly allied firms. Our paper is different from previous studies of non-financial joint ventures, financial and non-financial mergers and acquisitions, and non-financial strategic alliances in three important aspects/ways: First, we focus on financial institutions that form strategic alliances. Second, while most related studies use U.S. data, this paper employs Japanese data for the late 1990s, directly testing financial theory in a different setting. Finally, we study whether different types of alliances result in differing magnitudes of stock market responses.Our primary results are as follows: First, we find that a strategic alliance, on average, increases the value of the partner firms. This is consistent with the â¬Ssynergyâ¬? hypothesis. Second, the gains from the alliance are spread more widely among the partners than would be suggested by a random alternative, supporting a â¬Swin-winâ¬? hypothesis. Third, smaller partners tend to experience larger percentage gains, which is consistent with a â¬Srelative sizeâ¬? hypothesis. Fourth, the market values inter-group alliance announcements more than intra-group alliance announcements; the latter may well be seen as redundant. This is consistent with an â¬Sinter-group synergiesâ¬? hypothesis. Fifth, we do not find a significant difference in the abnormal returns showed by domestic-foreign alliances and domestic-domestic alliances, although both sets of alliances show significantly positive returns. We thus do not find support for a â¬Sforeign firm superiorâ¬? hypothesis. Finally, we find that an investment-banking alliance has a strong positive effect on abnormal returns, indicating that investment banking, which has been underdeveloped in Japan relative to the U.S., may be a promising business for financial institutions.Overall, this paper complements the existing literature in that we analyze the value of financial institution alliances. Our analysis reconfirms that strategic alliances are value-enhancing. This is consistent with previous studies that find increased value in the announcement of a strategic alliance or a merger. Our results are consistent with the notion that financial deregulation tends to increase competition, which, in turn, encourages firms to adopt aggressive corporate strategies. This is viewed as a positive move by investors, as evidenced by the average gains of the shareholders of these alliance-forging firms.

Abstract:
This paper examines the wealth effects of financial-institution strategic alliances on the shareholders of the newly allied firms. Our paper is different from previous studies of non-financial joint ventures, financial and non-financial mergers and acquisitions, and non-financial strategic alliances in three important aspects/ways: First, we focus on financial institutions that form strategic alliances. Second, while most related studies use U.S. data, this paper employs Japanese data for the late 1990s, directly testing financial theory in a different setting. Finally, we study whether different types of alliances result in differing magnitudes of stock market responses.Our primary results are as follows: First, we find that a strategic alliance, on average, increases the value of the partner firms. This is consistent with the â¬Ssynergyâ¬? hypothesis. Second, the gains from the alliance are spread more widely among the partners than would be suggested by a random alternative, supporting a â¬Swin-winâ¬? hypothesis. Third, smaller partners tend to experience larger percentage gains, which is consistent with a â¬Srelative sizeâ¬? hypothesis. Fourth, the market values inter-group alliance announcements more than intra-group alliance announcements; the latter may well be seen as redundant. This is consistent with an â¬Sinter-group synergiesâ¬? hypothesis. Fifth, we do not find a significant difference in the abnormal returns showed by domestic-foreign alliances and domestic-domestic alliances, although both sets of alliances show significantly positive returns. We thus do not find support for a â¬Sforeign firm superiorâ¬? hypothesis. Finally, we find that an investment-banking alliance has a strong positive effect on abnormal returns, indicating that investment banking, which has been underdeveloped in Japan relative to the U.S., may be a promising business for financial institutions.Overall, this paper complements the existing literature in that we analyze the value of financial institution alliances. Our analysis reconfirms that strategic alliances are value-enhancing. This is consistent with previous studies that find increased value in the announcement of a strategic alliance or a merger. Our results are consistent with the notion that financial deregulation tends to increase competition, which, in turn, encourages firms to adopt aggressive corporate strategies. This is viewed as a positive move by investors, as evidenced by the average gains of the shareholders of these alliance-forging firms.

Abstract:
The special status, large sizes, and recent rapid growth of Fannie Mae and Freddie Mac have created and/or contributed to a set of difficult policy problems that include: misguided and excessive subsidization of housing in the U.S.; the safety and soundness of the two companies; systemic risk; residential mortgage terms and structure; and the inherent efficiencies of the two companies. The two companies are embedded in a much larger web of policies that broadly and inefficiently encourage housing construction and consumption. The true privatization of the two companies is the best solution to the problems that specifically involve them and would constitute a good start toward correcting the excesses of American housing policy. This true privatization can be accomplished in a relatively clean and straightforward fashion.

Fannie Mae, Freddie Mac, government-sponsored enterprises, residential mortgages, securitization, privatization

Abstract:
The Internet Corporation for Assigned Names and Numbers (ICANN) - the non-profit company that is at the center of the Internet - has operated under a Memorandum of Understanding (MOU) with the U.S. Department of Commerce (DOC) since 1998. The MOU was replaced in September 2006 by the Joint Project Agreement (JPA) between ICANN and the DOC, which expires in August 2009. At that time, a decision needs to be made about ICANN’s future. Should the JPA tie with the U.S. Government be retained? Or should the link be wholly severed, as ICANN advocates? And, in either case, what governance structure would best promote Internet efficiency and innovation?

This paper evaluates the structure and governance of ICANN to help inform the upcoming decision. In particular, it reviews ICANN’s structure and functions, and also the structures of a number of other organizations that perform a roughly comparable range of private-sector and quasi-governmental coordination and standard-setting functions, to explore what might be applicable to ICANN.

We find that although ICANN has control over extremely important aspects of the Internet, it is largely accountable to no one. No organization with ICANN’s level of responsibility operates with the independence that ICANN enjoys, even under the current arrangement of nominal oversight by the U.S. Department of Commerce. ICANN’s proposal for complete privatization and termination of the DOC’s oversight would make the accountability problem worse.

Virtually all of the organizations that we reviewed are governed by their direct users, and we believe that this would be a good model for ICANN as well; it would also be consistent with the reduced regulatory role that we envision for ICANN. Governance by its direct users - the registries and the registrars - would provide the external accountability that could allow for eventually ending ICANN’s ties with the U.S. Government. However, we recommend that the new structure be permitted to operate for a while, to allow time for evaluation, before severing those ties.

We also address the issue of ICANN’s status as a de facto regulator. ICANN’s recent proposal to expand the number of generic top-level domains (gTLDs) highlights a distinct choice between alternative regulatory approaches: On the one hand, ICANN could proceed under the assumption that the market for gTLDs is not (and perhaps cannot be) at least workably competitive (as the U.S. Government apparently believes). ICANN would then assume greater public-utility type regulatory responsibilities. Alternatively, ICANN could allow relatively free entry into the domain space, in order to bring the benefits of a competitive gTLD market to consumers. We favor the latter approach, which is consistent with our proposal concerning governance reform. For free entry to work well, however, ICANN needs a less costly mechanism for protecting the intellectual property associated with domain names in order to address the problems of defensive registrations and cybersquatting.

Our specific recommendations are as follows:

- The JPA should be extended beyond its current expiration date. In the absence of changes in governance along the lines that we recommend, the JPA is particularly important. If our recommended changes are adopted, they should be permitted to become established before allowing the JPA to expire.

- ICANN should remain as a nonprofit organization, but its governance should be restructured, so that it is governed by and directly accountable to its direct users: the registries and the registrars. Seats on ICANN’s board of directors could be rotated among the major operators in a manner that would reflect the diversity of viewpoints among registries and registrars.

- ICANN should have a clear mission of encouraging competition. This implies a minimal role as a regulator with respect to the creation of new gTLDs. Instead, ICANN should adopt a relatively automatic way of introducing gTLDs, whereby any entity that meets a set of minimum technical and financial qualifications for being a registry should be able to be certified to become a registry for any gTLD that is not already taken.

- For this "open entry" policy to be workable and beneficial, ICANN must also strengthen the protections for incumbent domain name holders, so that they are not subject to "nuisance" or "ransom" demands from new registries; adopting an IP registry and strengthening ICANN’s "uniform dispute resolution policy" (UDRP) could be part of these improved protections.

These four recommendations are complementary, and combined they would significantly further the goals of Internet efficiency and innovation.

Abstract:
The reciprocal interlocking of chief executive officers (CEOs) is a non-trivial phenomenon of the composition of boards of directors and of corporate governance: among large companies in 1991, about one company in seven is part of a relationship whereby the CEO of one company sits on a second company's board and the second company's CEO sits on the first company's board. We are aware of no previous efforts to explain these reciprocal relationships. We hypothesize that reciprocal CEO interlocks are (a) more likely when a board has more outside directorships, (b) less likely when a CEO has more of his total annual compensation paid in the form of stock options, (c) less likely when a company's board is more active and holds more meetings, (d) less likely when a CEO has a larger ownership share of his company, and (e) more likely when there are more CEOs from other companies as outside directors on a CEO's board. Using a sizable sample of largecompanies in 1991, we employ simple probit and step probit models to test these hypotheses, with the use of control variables that encompass other company, board, and CEO characteristics. These multivariate analyses support our first three conjectures but do not support the remaining two.Since there is considerable academic and policy debate concerning board composition and the effectiveness of interlocking directorships in general, investigations focusing on reciprocal CEO interlocks, which link the highest ranked executives of two different firms, represent a significantcontribution to the knowledge base in this field.

Interlocking directorates, CEOs, Board of directors, Corporate governance, Stock options