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Abstract:
Building on the success of prediction markets at forecasting political elections and other matters of public interest, firms have made increasing use of prediction markets to help make business decisions. This Article explores the implications of prediction markets for corporate governance. Prediction markets can increase the flow of information, encourage truth telling by internal and external firm monitors, and create incentives for agents to act in the interest of their principals. The markets can thus serve as potentially efficient alternatives to other approaches to providing information, such as the Sarbanes-Oxley Act's internal controls provisions. Prediction markets can also produce an avenue for insiders to profit on and thus reveal inside information while maintaining a level playing field in the market for a firm's securities. This creates a harmless way around existing insider trading laws, undercutting the argument for the repeal of these laws. In addition, prediction markets can reduce agency costs by providing direct assessments of corporate policies, thus serving as an alternative or complement to shareholder voting as a means of disciplining corporate boards and managers. Prediction markets may thus be particularly useful for issues where agency costs are greatest, such as executive compensation. Deployment of these markets, whether voluntarily or perhaps someday as a result of legal mandates, could improve alignment between shareholders and managers on these issues better than other proposed reforms. These markets might also displace the business judgment rule because they can furnish contemporaneous and relatively objective benchmarks for courts to evaluate business decisions.

Abstract:
In recent decades, legal scholars have devoted substantially greater attention to studying the origin and nature of stare decisis than to defining the distinction between holding and dicta. This appears counter-intuitive when one considers, first, that stare decisis applies only to holdings of announced precedents, and second, that beyond problematic and rudimentary intuitions, the legal system has failed to develop meaningful definitions of these terms. While lawyers, legal scholars, and jurists likely assume that they can identify dicta when they see it, a careful analysis that categorizes the range of judicial assertions in need of proper characterization reveals that defining holding and dicta is more complex than the general trend of recent scholarship would suggest. In this Article, Professors Abramowicz and Stearns provide a comprehensive yet accessible framework for identifying the categories of assertions requiring classification as holding or dicta; a normative and positive framework for setting up a holding-dicta classification scheme; and, most importantly, a definition that resolves most if not all of the difficulties revealed in the course of their analysis. The authors develop a theoretical model that explores the nature and limits of stare decisis as a mechanism for constraining judicial behavior, and they explain the importance of clarity in the understanding of holding and dicta within a precedent-driven system of law. After critiquing the most influential definitions of holding and dicta, the authors offer and defend their own: A holding consists of those propositions along the chosen decisional path or paths of reasoning that are actually decided, are based upon the facts of the case, and lead to the judgment. A proposition in a case that is not holding is dicta.

holding dicta

Abstract:
Copyright theorists often observe that copyright law presents tradeoffs between incentives to produce new works and dissemination of existing works. In this Article, Professor Abramowicz points out that a marginal reduction in the number of works produced may enhance social welfare. As the industrial organization literature on product differentiation has long recognized, a potential entrant into an imperfectly competitive market does not take into account any reduction in business that entry will cause existing producers to suffer. As a result, entry may occur even if it reduces social welfare. Concern about the rent dissipation associated with such entry is particularly relevant to markets for copyrighted works, both because copyright inherently involves tradeoffs and because the low cost of reproducing copyrighted works means that marginal entry is less likely to expand the number of consumers whom a market can serve. Rent dissipation concerns, however, need not lead to radical copyright reform. To the contrary, such concerns help explain otherwise puzzling aspects of copyright law, including ways in which copyright is surprisingly narrow and ways in which it is surprisingly broad. For example, rent dissipation theory helps account for both the contours of fair use doctrine and the lengthy copyright term.

copyright, intellectual property

Abstract:
In this Article, Professor Abramowicz identifies a regulatory strategy that he calls "predictive decisionmaking" and provides a framework for assessing it. In a predictive decisionmaking regime, public or private decisionmakers make predictions, often of future legal decisions, rather than engage in normative analysis. Several scholars, particularly in recent years, have offered proposals that fit within the predictive decisionmaking paradigm, but have not noted the connection among these proposals. The Article highlights five different mechanisms on which predictive decisionmaking regimes may rely, including predictive standards, enterprise liability, accuracy incentives, partial insurance requirements, and information markets. After identifying several advantages that predictive decisionmaking strategies may have over nonpredictive alternatives, the Article identifies several potential problems with predictive decisionmaking, and develops a simple analytical framework for assessing predictive decisionmaking proposals. The Article concludes by illustrating variants on the mechanisms for accomplishing predictive decisionmaking in conjunction with new predictive decisionmaking proposals.

Abstract:
A number of commentators in recent years have suggested permitting holders of intellectual property rights to give up these rights in exchange for cash prizes from the government. In this Article, Professor Abramowicz shows that each of the proposals has significant flaws that would make implementation impractical and argues that no single perfect formula or algorithm for determining the size of prizes exists. A prize system is nonetheless worth pursuing because it could increase social welfare significantly by eliminating deadweight loss. Professor Abramowicz recommends a relatively simple approach that would complement rather than replace the patent system. The proposal is to establish an agency to distribute a fund that would be used to reward corporate efforts to reduce the monopoly effects of patent rights. As long as there is a substantial delay between the activities reducing deadweight loss and the granting of prizes, and as long as the rights to future prizes are tradable, granting of wide agency discretion has significant advantages and few drawbacks. Even assuming the agency is likely to do a poor job of distributing prizes, the system will be efficient if no biases in granting prizes are predictable. After addressing a variety of issues concerning the design of a prize system, Professor Abramowicz offers several potential applications for patent, copyright, and beyond.

Abstract:
FutureMAP, a project of the Defense Advanced Research Projects Agency, was to involve experiments to determine whether information markets could improve Defense Department decisionmaking. Information markets are securities markets used to derive information from the prices of securities whose liquidation values are contingent on future events. The government intended to use such a market to assess the probabilities of potential political assassinations, and the indelicacy of this potential application contributed to a controversy leading to the cancellation of the program. In this Article, Professor Abramowicz assesses whether information markets in theory could be useful to administrative agencies, and it concludes that information markets could help discipline administrative agency predictions, but only if a number of technical hurdles such as the danger of manipulation can be overcome. Because the predictions of well-functioning information markets are objective, they function as a tool that exhibits many of the same virtues in predictive tasks that cost-benefit analysis offers for normative policy evaluation. Both approaches can help to overcome cognitive errors, thwart interest group manipulation, and discipline administrative agency decisionmaking. The Article suggests that the two forms of analysis might be combined to produce a "predictive cost-benefit analysis." In such an analysis, an information market would predict the outcome of a retrospective cost-benefit analysis, to be conducted some years after the decision whether to enact a particular policy. As long as the identity of the eventual decisionmaker cannot be anticipated, predictive cost-benefit analysis estimates how an average decisionmaker would be expected to evaluate the policy. Because the predictive cost-benefit analysis assessment is not dependent on the identity of current agency officials, they cannot shade the numbers to justify policies that the officials prefer for idiosyncratic or ideological reasons.

Administrative law

Abstract:
Judge Leventhal famously described the invocation of legislative history as "the equivalent of entering a crowded cocktail party and looking over the heads of the guests for one's friends." The volume of legislative history is so great and varied, some contend, that judges cite it selectively to advance their policy agendas. In this article, we employ positive political and contextual theories of judicial behavior to examine how judges use legislative history. We consider whether opinion-writing judges, as Judge Leventhal might suggest, cite legislative history from legislators who share the same political-ideological perspective as the opinion-writing judge? Or do judges make such choices in a broader context than Judge Levanthal's statement suggests. We posit that an opinion writing judge would cite legislative statements supporting an outcome preferred by the opinion-writing judge, when such statements come from legislators who share the same political-ideological perspective as the opinion-writing judge's colleagues or superiors. This should be so regardless of whether the cited legislator shares the broader perspectives of the opinion-writing judge himself. Put in Leventhal's terms, instead of looking for their own ideological friends, judges look over the heads of the guests for the legislative friends of the judge's colleagues on the bench (or superiors on higher benches). We test this approach with court opinion data gathered from LEXIS and find evidence of hierarchy (high court oversight) and panel (co-members on a court) effects in citation to legislative history, effects that appear related to the political-ideological identification of judges who review or are co-members on a panel of the authoring judge. Specifically, we find that the higher the proportion of Republicans in the reviewing court or sitting on the same three-judge panel, the higher the proportion of legislative history cites that will be to Republican legislators, independent of the political orientation of the authoring judge.

Legislative History, Contextual Theory, Law and Positive Political Theory, Empirical, Judicial Behavior

Abstract:
In his famous paper advancing a prospect theory of patents, Edmund Kitch found inspiration in, but quickly dismissed, a footnote authored by Yoram Barzel suggesting that rights to inventions might be distributed through an auction mechanism. Kitch maintained that the patent system itself achieves the benefit of an auction by giving control over the inventive process at a relatively early stage. The patent system, moreover, avoids the need for governmental officials in an auction regime to define the boundaries of inventions that have not yet been created.

Patent auctions, however, may be more appealing if the auctions are for rights to inventive fields, rather than to specific inventions. Indeed, an auction system may be seen as an extreme version of the prospect theory approach, by allowing patents to be issued at an earlier stage and with broader scope than is feasible in a conventional patent system. Like prospects generally, auctions could help avoid the costs associated with duplicative patent races and with inventing around existing patents.

An additional advantage of auctions is that variations in the design of the auction mechanism can help respond to specific concerns about the prospect approach. For example, an auction awarding a patent to the party that agrees to commit the most resources to a particular technological field may alleviate concerns that the prospect approach could stifle rather than stimulate innovation. Similarly, to mitigate concerns about deadweight loss, the government could sponsor an auction in which the field is awarded to the party that, in addition to paying a set amount of cash, agrees to charge the lowest price or hold the patent for the shortest term.

The analysis, however, identifies a number of empirical uncertainties that together provide an uneasy case for the status quo. A principal problem is that there exists a fundamental tradeoff in auction design, between approaches that maximize the auction winner's incentive to develop inventions within the scope of the patent grant and approaches that most effectively reduce deadweight loss. There is no guarantee that the government would optimally resolve these tradeoffs ex ante. Although governmental officials ex post could compare bids that offer combinations of commitments to development and concessions on price, this approach too is prone to error. The government also faces a daunting informational task in determining when to hold a patent auction.

The danger of governmental errors suggests that if patent auctions are to have any place in our innovation policy, they must avoid governmental discretion in determining when auctions should occur and in identifying the most attractive bidders. An ambitious approach might be to use information markets to make both such determinations, though it may be too early in the history of information markets to assess whether they are up to the task. A more modest approach would allow patentees to demand auctions that would provide additional patent scope, with the caveat that a patentee would need to substantially outbid others to win such an auction, and failing victory would be fined.

intellectual property, patent, auctions, patent prospect theory

Abstract:
The Supreme Court Justices' votes in Bush v. Gore revealed a doctrinal inversion. The conservative justices limited the Florida Supreme Court's power to construe state election law and embraced an expansive application of equal protection doctrine to determine the outcome of a presidential election, while the liberal justices advocated judicial restraint in presidential elections and respect for state court construction of state law. This anomaly invited claims in the popular press and in the legal academy that justices were behaving strategically, a timely observation given an increasing focus in recent judicial politics literature on strategic behavior by justices. In this Article, Professors Abramowicz and Stearns use Bush v. Gore to argue that although justices are influenced by their ideological preferences and at times act strategically, institutional norms and doctrine sharply constrain strategic behavior. At the same time, they show how judicial politics and social choice, disciplines generally treated separately, together illuminate case analysis. These theories, when deployed in tandem, explain not only the inversion described above, but also a number of other puzzling features of the various opinions. Based upon clearly articulated assumptions, Professors Abramowicz and Stearns combine judicial politics and social choice to explain, for example, why seven justices, including some who would have preferred a straight reversal and others who would have preferred a straight affirmance, acquiesced in finding an equal protection problem, while no other justices conceded to Chief Justice Rehnquist and Justices Scalia and Thomas in finding a violation of Article II, even though most commentators admit that whatever the overall merits of the case, the second argument was the stronger of the two. The Article further explains why the per curiam majority included a nominal remand, even though the mandate afforded the Florida Supreme Court no room to maneuver and was thus more consistent with a straight reversal. This case study not only provides answers to some of the most intriguing questions about Bush v. Gore, but also develops a technique for combining the tools of judicial politics and social choice, which bridges the demands of predictability of central concern to data-driven political scientists and an understanding of the nuances of doctrine of central concern to legal scholars.

Abstract:
Courts have become increasingly skeptical about rules restricting plaintiffs' ability to sell legal claims, and legal commentators have argued that markets for claims would be efficient, moving claims to those who can prosecute them most efficiently. Claim sales intuitively might appear to present a clash of economic and philosophical arguments, with perceived efficiency benefits coming at the expense of societal commitments to values other than efficiency. In this Article, Professor Abramowicz argues that economic and philosophical arguments do point in opposite directions, but in the reverse directions from what one might expect. A range of philosophical and other noneconomic considerations, such as concerns about commodification, corrective justice, legal ethics, and procedural justice, pose no significant problems for claim sales. There is, however, a significant economic problem. Markets for legal claims face a particularly strong adverse selection effect, because a prospective purchaser must consider not only why the plaintiff wishes to dispose of the claim, but also why the plaintiff cannot obtain a better deal from the defendant. Thus, even a regime permitting alienation might result in very few claim sales, and many of those may be motivated by prospective inefficiencies, such as attempts to manipulate the path of legal doctrine. If, however, in some legal context plaintiffs managed to overcome this adverse selection problem, so that claim sales became the norm, the economic concern would be eliminated. But philosophical concerns would reemerge, as this Article shows by using a hypothetical mandatory alienation regime as a heuristic device.

sale of legal claims

Abstract:
Intellectual property protects investments in the production of information, but the literature on the topic has largely neglected one type of information that intellectual property might protect: information about the market success of goods and services. A first entrant into a market often cannot prevent other firms from free-riding on information about consumer demand and market feasibility. Despite the existence of some first-mover advantages, the incentives to be the first entrant into a market may sometimes be inefficiently low, thereby giving rise to a net first-mover disadvantage and discouraging innovation. Intellectual property may counteract this inefficiency by providing market exclusivity, thus promoting earlier market entry and increasing the level of entrepreneurial activity in the economy. The goal of encouraging market experimentation helps to explain certain puzzling aspects of intellectual property doctrine and provides a coherent basis for appreciating some of the current criticisms of intellectual property rights.

Intellectual Property, Innovation, Market Experimentation, Entrepreneurship, Entrepreneurial, Hayek, Schumpeter, Knight, Patent, Copyright, Trademark, Trade Secret, Development, First-mover advantage

Abstract:
The logarithmic market scoring rule has emerged as a standard automated market maker. The approach is particularly useful for combinatorial markets, but this article argues that for a variety of prediction market applications, the quadratic market scoring rule may be more sensible. With that rule, liquidity is uniform across the probability or prediction spectrum. Moreover, the rule can easily be adapted for contexts in which greater liquidity is desired for some portion of the probability or prediction spectrum. For each binary or linear outcome being predicted, two separate markets are used, so that a forecaster can always buy shares in either the low market or the high market to change the group prediction. The approach can be used as the basis for both conditional and deliberative prediction markets.

prediction market, automated market maker

Abstract:
Commentators have long recognized that much of the work of commercializing an invention occurs after a patent is received. They have not recognized, however, that by the time market conditions make commercialization potentially attractive, the remaining patent term might be sufficiently short that a patentee will not develop an invention or will not spend as much on development as if more patent term remained. The concern about patent underdevelopment provides a counterweight to patent prospect theory, which urges that patents be issued relatively early. By insisting on a substantial degree of achievement before patenting, the patent system reduces the risk of patent underdevelopment. Underdevelopment may still be a problem for some inventions, however, for example in the field of genomics. A possible solution is a system of patent extension auctions. A patentee would be allowed to request such an auction, but could win it only by substantially outbidding third parties. Patentees will call for auctions only when the benefits of ownership continuity, and thus of continued patent development, are relatively high.

Abstract:
Executive branch agencies typically use a process of "notice-and-comment" to permit the public to respond to the proposed text of rules. The legal literature has not considered whether a similar process would be helpful for the judicial branch. In this Article, Professors Abramowicz and Colby argue that it would be. Neither the parties to a litigation nor third parties generally have an opportunity to comment on judicial opinions after they are drafted but before they are made final. As a result, judicial opinions often contain errors and frequently have far-ranging and unanticipated negative consequences. A notice-and-comment system could mitigate these concerns, and could also help to constrain judges to follow the rule of law and to improve the legitimacy of the judicial process.

notice-and-comment, judges, errors

Abstract:
In advancing his prospect theory of patents, Edmund Kitch dismissed the possibility of distributing rights to particular inventions through auctions, arguing that the patent system avoids the need for governmental officials to define the boundaries of inventions that have not yet been created. Auctions for patent rights to entire inventive fields, however, might accentuate the benefits of a prospect approach, by allowing for earlier and broader patents. Auction designs that award the patent to the bidder that commits the most money to research and development or that agrees to charge the lowest price, meanwhile, can reduce the costs of the prospect approach. Concerns about the government's ability to decide correctly when to hold auctions, however, provide an uneasy case for patent races over patent auctions. More modest uses of auctions might improve welfare, though. For example, an auction to a small number of parties of the right to race in a technological field might reduce wasteful duplication and thus accelerate innovation. Similarly, patentees might be allowed to demand auctions for extended patent scope, with the caveat that a patentee would need to outbid others by a substantial amount to win such an auction.

intellectual property, patent, auctions, patent prospect theory

Abstract:
Lester Brickman's article establishes that the market for contingent fee lawyers is unusual, perhaps even bizarre. By removing legal impediments to the solicitation of clients, by unleashing the capital markets to finance legal claims, and by allowing intermediaries to match client and counsel, we could produce competition. Brickman has convinced me that there is little competition in contingency fee markets, and that such markets could be much more competitive. But I am not sure there is as little competition as he thinks, or that the changes in legal regimes he proposes would be sufficient to make the markets more competitive.

Legal market, solicitation, legal claims, competition, contigency fee, contigency fee markets

Abstract:
Social scientists have performed and analyzed a number of randomized studies of policies, but the legal literature has not addressed whether and how the legal system should incorporate experimental methods. This Article identifies several benefits of randomized legal experimentation and argues that these benefits supports self-executing experiments, whose results would lead to policy changes agreed upon in advance. Randomized experiments can generate information, and self-execution can help ensure that this information affects the policy process. Such experiments may be easier to enact than other legal reforms, because each side of a policy debate may believe that an experiment is likely to support its cause. This Article argues that administrative law doctrine should be more deferential to agency decisions to perform such experiments than to enact policies without evidence from randomized experiments. The Article describes the advantages and limitations of randomization, and explores ethical and equality-based arguments against experimentation.

random experiment law

Abstract:
This Article considers the possibility of providing incentives to judges to decide cases in the same way that an appellate panel would decide them. Random selection of a proportion of cases for retrial could be used to encourage judges to place aside their preferences in deference to the perceived preferences of a majority of judges. Providing such incentives to judges may reduce the need for alternative approaches to reducing judicial discretion, such as substantive law based on rules rather than on discretion. An information market similarly could be used to accomplish the task of adjudication, with some cases randomly selected for traditional adjudication to discipline the information market participants. Such an approach may be more cost-efficient than provision of monetary incentives to judges where information is widely dispersed, or where it is impractical for the government to hire enough judges to handle a large group of cases. Advantages and disadvantages of these approaches are discussed.

Abstract:
By lowering the costs of distributing and sharing information, the Internet makes it easy for dispersed individuals to debate political and legal issues. This Article asks whether it might facilitate something far more radical: distributed decisionmaking. The Article is a constructive thought experiment, gradually building a market-like mechanism run over the Internet, that could be used to adjudicate cases. Traders would be required to value litigation securities, and these valuations would subject traders to selling the securities to or purchasing them short from other traders. The valuations at the close of the market would determine liability without any recourse to traditional courts. The Article explains the game-theoretic dynamics that would give traders incentives to consider applicable law and broader conceptions of justice in valuing securities, and it explores the technical issues inherent in preserving these dynamics in a workable market-like structure. In its most advanced formulation, cyberadjudication would not merely resolve individual cases but would create a web of jurisprudence, one in which securities would correspond to particular legal or factual issues, and a single trade could propagate to affect many different cases. Though this would be a marked departure from traditional legal structures, indeed almost surely too marked to justify implementation in the immediate future, there are a variety of reasons that it might be particularly useful as a means of resolving Internet-related controversies.

Internet, distributed decisionmaking, litigation securities, game-theoretic dynamics, cyberadjudication

Abstract:
By lowering the costs of distributing and sharing information, the Internet makes it easy for dispersed individuals to debate political and legal issues. This Article asks whether it might facilitate something far more radical: distributed decisionmaking. The Article is a constructive thought experiment, gradually building a market-like mechanism run over the Internet, that could be used to adjudicate cases. Traders would be required to value litigation securities, and these valuations would subject traders to selling the securities to or purchasing them short from other traders. The valuations at the close of the market would determine liability without any recourse to traditional courts. The Article explains the game-theoretic dynamics that would give traders incentives to consider applicable law and broader conceptions of justice in valuing securities, and it explores the technical issues inherent in preserving these dynamics in a workable market-like structure. In its most advanced formulation, cyberadjudication would not merely resolve individual cases but would create a web of jurisprudence, one in which securities would correspond to particular legal or factual issues, and a single trade could propagate to affect many different cases. Though this would be a marked departure from traditional legal structures, indeed almost surely too marked to justify implementation in the immediate future, there are a variety of reasons that it might be particularly useful as a means of resolving Internet-related controversies.

Internet, distributed decisionmaking, economics of litigation, game theory, cyberadjudication