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Abstract:
This paper provides a comprehensive review of the empirical literature in transaction cost economics (TCE) across multiple social science disciplines and business fields. We show how TCE has branched out from its economic roots to examine empirical phenomena in several other areas. We find TCE is increasingly being applied not only to business-related fields such as accounting, finance, marketing, and organizational theory, but also to areas outside of business including political science, law, public policy, and agriculture and health. With few exceptions, however, the use of TCE reasoning to inform empirical research in these areas is piecemeal. We find that there is considerable support of many of the central tenets of TCE, but we also observe a number of lingering theoretical and empirical issues that need to be addressed. We conclude by discussing the implications of these issues and outlining directions for future theoretical and empirical work.

Transaction Cost Economics, Organizational Theory

Abstract:
This paper argues that Jewish merchants have historically dominated the diamond industry because of their ability to reliably implement diamond credit sales. Success in the industry requires enforcing executory agreements that are beyond the reach of public courts, and Jewish diamond merchants enforce such contracts with a reputation mechanism supported by a distinctive set of industry, family, and community institutions. An industry arbitration system publicizes promises that are not kept. Intergenerational legacies induce merchants to deal honestly through their very last transaction, so that their children may inherit valuable livelihoods. And ultra-Orthodox Jews, for whom participation in their communities is paramount, provide important value-added services to the industry without posing the threat of theft and flight.

Dispute Resolution, Private Ordering, Religion & Economics, Reputation Mechanisms

Abstract:
This Article employs a behavioral economic analysis to understand why Medicaid has failed to improve the health outcomes of its beneficiaries. It begins with a formal economic model of health care consumption and then systematically incorporates a survey of psychosocial variables to formulate explanations for persistent health disparities. This methodology suggests that consulting the literature in health psychology and intertemporal decision theory - empirical sources generally excluded from orthodox economic analysis - provides valuable material to explain certain findings in health econometrics. More significantly, the lessons from this behavioral economic approach generate useful policy considerations for Medicaid policymakers, who largely have neglected psychosocial variables in implementing a health insurance program that rests chiefly on orthodox economic assumptions.

The Article's chief contributions include an expansion of the behavioral economic approach to include a host of variables in health psychology, a behavioral refinement of empirical health economics, a behavioral critique of Medicaid policy, and a menu of suggested Medicaid reforms.

Behavioral Economics, Health Economics, Health Care, Health Policy, Medicaid

Abstract:
This paper formulates a positive model that predicts when parties will employ private ordering to enforce their agreements. The typical enforcement mechanism associated with private ordering is the reputation mechanism, when a merchant community punishes parties in breach of contract by denying them future business. The growing private ordering literature argues that these private enforcement mechanisms can be superior to the traditional, less efficient enforcement measures provided by public courts. However, previous comparisons between public and private contractual enforcement have presented a misleading dichotomy by failing to consider a third enforcement mechanism: the vertically integrated firm.

This paper develops a model that comprehensively addresses three distinct types of enforcement mechanisms - firms, courts, and reputation-based private ordering. The model rests on a synthesis of transaction cost economics, which compares the efficiencies of firms versus markets, and the private ordering literature, which compares the efficiencies of public courts versus private ordering. It hypothesizes that private ordering will arise when agreements present enforcement difficulties, high-powered market incentives are important, and the costs of entry barriers are low. The paper then compares the model's predictions to documented instances of private ordering, and this illustrative test suggests that the model is consistent with empirical studies in the private ordering literature.

Private Ordering, Contract Enforcement, Transaction Cost Economics

Abstract:
This paper develops a transaction cost economic model for regulation and applies the model to environmental siting regulations designed to overcome NIMBY (Not In My Back Yard) political opposition.

Negotiations between developers and resistant local communities to site waste facilities, such as landfills or solid waste incinerators, can be characterized as a contracting problem. A rudimentary application of the Coase theorem suggests that developers should be able to compensate communities adequately for hosting a waste facility, but rarely do such negotiations find success. Transaction costs associated with the requisite negotiations, communication, and implementation of the projects preclude efficient bargaining, and thus NIMBY opposition halts the siting of socially necessary and beneficial facilities. Viewing NIMBY disputes as a contracting problem within the world of positive transaction costs therefore reveals the dynamics that foil negotiations between developers and communities. Such a perspective also identifies the role that the theory of the firm can play in understanding how siting regulations overcome those transaction costs and how regulatory regimes can be optimally designed for siting alternative facilities.

This paper employs the theory of the firm, specifically transaction cost economics, to articulate the functional purpose of environmental siting regulations and to chart an agenda for regulatory reform. While transaction cost economics traditionally compares mechanisms such as spot markets, contracts, and direct ownership to facilitate economic transactions, we extend transaction cost theory to political transactions between policymakers and initially resistant, though potentially supportive, constituencies. We believe this approach offers a fruitful perspective on regulatory policy. We use it to develop a taxonomy of alternative regulatory regimes and then to propose an overview of regulatory reform for siting socially desirable waste facilities that are either blocked by NIMBY opposition or are unnecessarily shielded from effective negotiations and community participation.

Environmental Regulation, Transaction Cost Economics, Land Use, NIMBY

Abstract:
Research that examines entrant-incumbent dynamics often points to the organizational limitations that constrain incumbents from successfully pursuing new technologies or fending off new entrants. Some incumbents are nevertheless able to successfully implement organizational structures and develop routines that overcome these institutional constraints. We provide a case-study analysis of how three firms - Motorola, IBM and Kodak - responded to "discontinuous" innovations and the associated structural and organizational limitations that are typical to incumbent organizations. Each firm was able to capture gains from new technologies and develop profitable products in emerging markets, although their abilities to sustain these gains varied due to subsequent organizational changes.

Drawing from these case studies, we synthesize how firms can institute organizational strategies to continue to capture gains from disruptive innovations. A schema suggests that particular organizational strategies are comparatively optimal for corresponding points along innovation lifecycle.

Architectural/Radical Innovation, Entrant-Incumbant Competition, Managemenet of Technology

Abstract:
This article explores the hypothesis that the U.S. health care system operates more like a robber baron than like Robin Hood, burdening ordinary payers of health insurance premiums disproportionately for the benefit of industry interests and higher-income consumer-taxpayers. Thus, lower- and middle-income Americans with health coverage pay not only for their own families' health care but also to support a vast health care enterprise that primarily benefits others, including many far more affluent than themselves. The system is able to finance itself in part because U.S.-style health insurance greatly amplifies price-gouging opportunities for health care firms with market power, creating a cost burden that falls ultimately on all premium payers equally, like a severely regressive head tax. Moreover, these same consumers also bear excessive costs for their own health care because, not seeing the costs they bear with any clarity (since the tax system makes those costs appear to fall on their employers rather than themselves), they demand unnecessarily costly coverage and resist efforts to economize - all to the benefit of the health care industry and others with reasons to value high-cost medicine. Lower-income insureds also appear, for several reasons, to get less out of their employers' health plans than their higher-income coworkers, despite paying the same premiums. Finally, insured individuals' lack of cost-consciousness also affects their attitudes and behavior as citizens and as voters, enabling politicians as well as industry interests to make choices on their behalf that systematically raise costs and foreclose economizing possibilities. The burden of excess health care costs and how it is distributed is rarely recognized as the fundamental issue of social justice it is. The purpose of this article is to make the question who pays and who benefits a principal concern of health policymakers.

Abstract:
This paper addresses the contradictory results obtained by Segal (1997) and Spiller & Gely (1992) concerning the impact of institutional constraints on the U.S. Supreme Court's decision making. By adapting the Spiller & Gely maximum likelihood model to the Segal dataset, we find support for the hypothesis that the Court adjusts its decisions to presidential and congressional preferences. Data from 1947 to 1992 indicate that the average probability of the Court being constrained has been approximately one-third. Further, we show that the results obtained by Segal are the product of biases introduced by a misspecified econometric model. We also discuss how our estimation highlights the usefulness of Krehbiel's model of legislative decision making.

Abstract:
This paper addresses the contradictory results obtained by Segal (1997) and Spiller & Gely (1992) concerning the impact of institutional constraints on the U.S. Supreme Court's decision making. By adapting the Spiller & Gely maximum likelihood model to the Segal dataset, we find support for the hypothesis that the Court adjusts its decisions to presidential and congressional preferences. Data from 1947 to 1992 indicate that the average probability of the Court being constrained has been approximately one-third. Further, we show that the results obtained by Segal are the product of biases introduced by a misspecified econometric model. We also discuss how our estimation highlights the usefulness of Krehbiel's model of legislative decision making.

Abstract:
Courts reviewing proposed mergers of nonprofit hospitals have been abandoning the bedrock principles of antitrust law, failing to pay heed to the most elemental hallmarks of socially beneficial competition - maximizing allocative efficiency and total surplus. This article suggests that courts' inability to recognize antitrust concerns in these cases reflects a failure to understand the structural details of the American health care market. After reviewing recent cases in which courts have denied challenges to proposed mergers between nonprofit hospitals, it documents how courts have engaged in a faulty analysis that ultimately protect nonprofit hospitals from the rigors of standard antitrust scrutiny. It then identifies the bedrock principles of antitrust law - preventing supracompetitive prices, optimizing output, and maximizing allocative efficiency - that have been absent from, if not violated by, the rulings in these merger cases.

nonprofits, hospital mergers, health care competition

Abstract:
Rockingham County v. Luten Bridge Co. is now a staple in most contracts casebooks. The popular story goes as follows: Rockingham County entered into a contract with the Luten Bridge Company to build a bridge over the Dan River. Shortly after work commenced, the county repudiated the contract. Nonetheless, the Luten Bridge Company continued with its construction project and sued the county for the entire bill. Judge John J. Parker, the longtime Chief Judge of the Fourth Circuit, ruled in the famous 1929 opinion that the county was liable only for the costs up until the time of breach, a sum of approximately $1,900, plus the anticipated profit, and not for the entire bill that was closer to $18,000. The case is used to illustrate the "duty to mitigate," whereby a party to a contract against whom a breach has occurred is obligated to mitigate the damages resulting from that breach.

A closer look at the case reveals that the underlying dispute was more about the legitimacy of local government. The dispute emerged when angry taxpayers charged the county commissioners with pursuing a corrupt agenda on behalf of the industrialist who sponsored their political campaigns. But the conflict also revealed traditional tensions between the county's farmers and its mercantile mill owners and constituted a microcosm of the larger political conflict—endemic throughout North Carolina and the South—over investing in public improvements to promote industrialization. Judge Parker's opinion was an effort to arm county governments with the powers necessary to facilitate industrialization and secure good governance. The duty to mitigate damages was merely an afterthought.

Abstract:
This paper incorporates a survey of psychosocial variables into a formal economic model of health care consumption. It suggests that consulting the literature in health psychology and intertemporal decision theory provides valuable material to explain certain findings in health econometrics. More significant, the lessons from this behavioral economic approach is particularly useful to Medicaid policymakers, who largely have neglected psychosocial variables in implementing a health insurance program that rests chiefly on orthodox economic assumptions.

The paper's chief contributions include an expansion of the behavioral economic approach to include a host of variables in health psychology, a behavioral refinement of empirical health economics, and a behavioral critique of Medicaid policy.

Behavioral Economics, Health Economics, Health Care, Health Policy, Medicaid

Abstract:
For nearly one millenium, the diamond industry's distribution system remained largely unchanged. Ethnic networks, predominated by Jewish merchants, managed the downstream distribution system. Since state courts are unable to reliably enforce executory contracts for diamond sales, these networks succeeded because their community institutions were able to assert extralegal governance. But recent trends in the globalisation of commerce have introduced pressures that might cause the one thousand year-old system to unravel. Low-wage workers from India have displaced higher wage western merchants, consumer demands for political oversight has brought scrutiny to previously secretive networks, and the profitability of global branding campaigns has enabled DeBeers to implement a vertically integrated business strategy that skips the middleman and sells directly to consumers. Since these pressures represent the paradigmatic forces of globalisation, examining changes in the diamond industry offers insights both into the future of ethnic exchange and into globlisation itself.

Abstract:
Recent discussions in health reform circles have pinned great hopes on the prospect of innovation as the solution to the high-cost, inadequate-quality U.S. health system. But U.S. health care institutions - insurers, providers, and specialists - have ceded leadership in innovation to Indian hospitals such as Care Hospital in Hyderabad and the Fortis Hospitals around New Delhi, which have U.S.-trained doctors and can perform open heart surgery for $6,000 (compared to $100,000 in the United States). The Indian success is a window into America's stalemate with inflating costs and stagnant innovation.

Abstract:
An agreement among competitors to refuse to deal with another party is traditionally per se illegal under the antitrust laws. But coordinated refusals to deal are often necessary to punish wrongdoers, and thus to deter undesirable behavior, that state sponsored courts cannot reach. When viewed as a mechanism to govern transactions and induce socially desirable cooperative behavior, coordinated refusals to deal can sustain valuable reputation mechanisms. This paper employs institutional economics to understand the role of coordinated refusals to deal in merchant circles and to evaluate the economic desirability of permitting such coordinated actions among competitors. It concludes that if the objective of antitrust law is to promote economic welfare, then per se treatment - or any heightened presumption of illegality - of reputation mechanisms with coordinated punishments is misplaced.

Abstract:
The indirect purchaser rule, established three decades ago in Illinois Brick v. Illinois, has generated sufficiently steady and widespread criticism that Congress's Antitrust Modernization Commission is now considering possible reforms. The debate over reforms, however, has been constrained by an undue emphasis on legal formalism and has failed to generate innovative alternatives. We review the development of the doctrine, identify its significant shortcomings, and articulate the functional objectives that antitrust rules of standing should pursue. Building off these objectives, which constitute the foundations of antitrust law, and incorporating some lessons from securities law, we propose a mechanism that opens antitrust suits to indirect purchasers, consolidates the multiple claims, and designates a presumptive lead plaintiff.

Antitrust Standing, Indirect Purchaser Rule, Illinois Brick

Abstract:
This paper is a draft of a chapter for a forthcoming book, Public Choice and Public Law, edited by Daniel Farber and Anne Joseph O'Connell, to be published by Edward Elgar. This chapter reviews the literature on the selection of regulatory policy instruments, from both normative and positive perspectives. It first reviews the mechanism design literature to identify normative objectives in selecting among the menu or toolbox of policy instruments. The chapter then discusses the public choice and positive political theory literatures and the variety of models developed to attempt to predict the actual selection of alternative policy instruments. It begins with simpler early models focusing on interest group politics and proceeds to more complicated models that incorporate both supply and demand for policy, the role of policy entrepreneurs, behavioral and cognitive choice, and public perceptions and mass politics. It compares these theories to empirical experience. The chapter examines literature in law, economics, political science, and related fields, and it draws examples from US, European, and international regulation. It concludes with suggestions for future research.

Abstract:
While American policymakers and commentators have traditionally focused on three aspects of the health care system - access, cost, and quality - they have neglected an arguably coequal fourth issue: equity in the distribution of health care costs and benefits. This brief introduction to a symposium volume entitled Who Pays? Who Benefits? Distributional Issues in Health Care suggests that the American health system takes excessive resources from working-class payers of health insurance premiums to finance an industry that serves the interests of others far better than their own. In addition to summarizing several aspects of the unfairness problem, the Foreword urges policymakers and the academic community to pay greater attention to issues of distributive justice in health care, lays out a research agenda for extending the work begun by the symposium's contributors, and expresses the hope that deeper understanding will add to the urgency of reforming American health care.

Abstract:
This chapter, published in Contracts Stories (Foundation Press 2007), reveals the story - the clash of personalities, the economic tensions, and the political significance - behind Rockingham County v. Luten Bridge Co.

Abstract:
This comment, delivered at the Duke Law Journal's conference on Measuring Judges and Justice, suggests that there is much to learn about judges from thinking about doctors.

Abstract:
Seeking to redress health disparities across income and race, many policymakers mandate health insurance benefits, presuming that equalized benefits will help equalize use of beneficial health services. This paper tests that presumption by measuring health care use by a diverse population with comprehensive health insurance. Focusing on use of mental health care and pharmaceuticals, it finds that even when insurance benefits and access are constant, whites and those with high incomes consume more of these benefits than other people do. This suggests that privileged classes extract more health care services even when everyone pays equal premiums for equal insurance coverage.

Abstract:
Although federal judges have resisted giving due effect to standard antitrust principles in scrutinizing mergers of nonprofit hospitals, the presence of health insurance makes it especially important to oppose monopoly in health services markets. U.S.-style health insurance gives monopolist providers extraordinary pricing freedom, thus exacerbating monopoly’s usual redistributive effects. Significant allocative inefficiencies - albeit not the kind generally associated with monopoly - also result when the monopolist is a nonprofit hospital. Because it is probably impossible to undo past hospital mergers creating undue market power, we suggest another remedy: the application of antitrust rules against "tying" arrangements so that purchasers can more easily frustrate hospitals' profit-enhancing practice of overcharging for large bundles of services rather than separately exploiting each monopoly they possess.

Abstract:
This chapter, presented at a conference on Our Fragmented Health Care System at the Petrie-Flom Center for Health Law Policy, discusses consumption disparities in outpatient mental health services among a diverse insured working population. We first observe that despite paying equal insurance premiums and enjoying equal insurance coverage, lower-income and non-white workers consume fewer insurance benefits than their white and higher-income coworkers. We do not find any evidence, however, that this leads to adverse health outcomes. We additionally find that non-whites and low-income individuals are more likely than their white and high-income counterparts to obtain mental health care from general practitioners rather than mental healthcare providers, and nearly twice as likely not to follow up with a mental health provider after hospitalization with a mental health diagnosis.

These findings suggest that low-income and non-white individuals might be paying for health services that primarily benefit their white and more affluent coworkers. Many of these regressive consequences can be attributed to mental health insurance carve-outs, which is a product of the fragmented delivery of health care.