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Abstract:
Study of two comprehensive class action case data sets covering 1993-2002 shows that the amount of client recovery is overwhelmingly the most important determinant of the attorneys' fee award. Even in cases in which the courts engage in the lodestar calculation (the product of reasonable hours and a reasonable hourly rate), the client's recovery generally explains the pattern of awards better than the lodestar. Thus, the time and expense of a lodestar calculation may be wasteful. We also find no robust evidence that either recoveries for plaintiffs or fees of their attorneys increased over time. The mean fee award in common fund cases is well below the widely-quoted one-third figure, constituting 21.9 percent of the recovery across all cases for a comprehensive data set of published cases. A scaling effect exists: fees constitute a lower percent of the client's recovery as the client's recovery increases. Fees are also correlated with risk: the presence of high risk is associated with a higher fee, while low risk cases generate below-average fees. Fees as a percent of class recovery were found to be higher in federal than state court. The presence of "soft" relief (such as injunctive relief or coupons) has no material effect on the fee, whether or not the soft relief was calculated in the quantified benefit for the class used as the basis for computing the attorney's fee. The study also addressed costs and expenses. Like fees, these displayed significant scale effects. The paper proposes a simple methodology by which courts can evaluate the reasonableness of fee requests.

Abstract:
This Paper develops extensive new indices of legal independence (Central Bank Independence, or CBI) for new central banks in 26 former socialist economies (FSEs). The indices reveal that central bank reform in the FSE during the 1990s has been quite ambitious. In spite of large price shocks, reformers in those countries have chosen to create central banks with levels of legal independence that are substantially higher, on average, than those of developed economies during the 1980s. The evidence in the Paper shows that CBI is unrelated to inflation during the early stages of liberalization. But with sufficiently high and sustained levels of liberalization, and controlling for other variables, legal CBI and inflation are significantly and negatively related. These findings are consistent with the view that even high CBI cannot contain the initial powerful inflationary impact of removing price controls. But once the process of liberalization has gathered sufficient momentum legal independence becomes effective in reducing inflation. The Paper also presents evidence on factors that affect the choice of CBI and it examines the relation between inflation and CBI in a broader sample.

Central banks, inflation, legal independence, reform, transition economies

Abstract:
This paper develops extensive new data on the legal independence of new central banks in 26 former socialist economies (FSE). This data is constructed using the codification system for mesuring legal independence developed in Cukierman, Webb and Neyapti (1992) and in chapter 19 of Cukierman (1992). This makes it comparable with earlier data on central bank independence (CBI) in the industrial democracies, and in non FSE developing countries, and permits experimentation with alternative indices of CBI like those reviewed in Eiffinger and van Kuelen (1995).

The new indices of independence indicate that central bank (CB) reform in the FSE during the nineties has been quite ambitious. In spite of the large price shocks induced by the transformation from plan to market, reformers in those countries chose to create central banks with levels of legal independence that are substantially higher, on average, than those of developed economies during the eighties.

Based on data from 1989 through 1998 the evidence in the paper suggests that CBI is unrelated to inflation during the early stages of liberalization. But for sufficiently high and sustained levels of liberalization, and controlling for variables like price decontrols and wars, legal CBI and inflation are significantly and negatively related. This is consistent with the view that legal independence cannot contain the powerful inflationary impact of wide scale liberalization of formerly controlled prices. But, once the process of liberalization has gathered sufficient momentum, legal independence becomes effective in slowing inflation down and the cumulative liberalization index developed by de Melo et. al. (1996) becomes relatively less important.

The paper also presents evidence on factors that affect the level of CBI and examines the relation between inflation and CBI within a broader sample composed of the transition and of the developed economies.

central banks, legal independence, transition economies, inflation, reform

Abstract:
This article analyzes a data set of reported decisions from 1992-2003 in which the number of opt-outs and/or objectors to class action settlements was quantified. The numbers of opt-outs and objections were uniformly low and in some cases nearly trivial. On average, less than 1% of class members opt-out and about 1% of class members object to class-wide settlements. Civil rights and employment discrimination class actions have relatively higher objection rates, but even these are less than 5% of the class. Securities, antitrust, and consumer class actions have the lowest rates of dissent. Dissent rises with the average recovery per class member and falls as a percentage of the class as the size of the class increases. Dissent is not correlated with the attorneys fee as a percent of the class recovery. The rate of objection to a settlement is negatively correlated with the chance that the settlement will be approved, but the rate of opt-outs has no correlation with settlement approval. Levels of dissent exhibit a noticeable decline over the period of the study. This study has a variety of implications for the law of class actions.

Abstract:
This paper discusses the importance of paternal bonding in the law of family relations. Drawing on the metaphor of couvade--pregnancy symptoms in expectant fathers--the paper argues that men have a closer connection with the process of procreation than is commonly supposed in contemporary family law. The paper evaluates the paternal role in seven stages or events connected with procreation--contraception, conception, pregnancy, abortion, perinatal loss, labor and delivery, and early infant care. The paper then considers three legal contexts in which paternal bonding during procreation plays a role: abortion, adoption of children born out of wedlock, and custody/visitation during divorce.

Abstract:
We study a data set of 2,858 contracts contained as exhibits in Form 8-K filings by reporting corporations over a six month period in 2002 for twelve types of contracts and a seven month period in 2002 for merger contracts. Because 8-K filings are required only for material events, these contracts likely are carefully negotiated by sophisticated parties who are well-informed about the contract terms. These contracts, therefore, provide evidence of efficient ex ante solutions to contracting problems. The vast majority of contracts did not require arbitration. Only about 11 percent of the contracts included binding arbitration clauses. The rate of arbitration clauses varied substantially by type of contract. For example, pooling and servicing agreements and trust agreements had no arbitration clauses while employment and licensing contracts had the highest rate of arbitration clauses, 37 percent and 33 percent respectively. Arbitration clauses are strongly negatively associated with standardization of contract terms: the more standardized the contract, the less likely it will mandate arbitration of disputes. Contracts with California connections tended to have high rates of arbitration clauses while contracts with New York connections tended to have low rates of arbitration clauses. Arbitration clauses were significantly more likely to appear in contracts with international connections, but even in such contracts, the clauses were infrequent in absolute terms. Only 20 percent of international contracts contained arbitration clauses compared to ten percent of domestic contracts. Our results suggest, in contracts involving two sophisticated actors, that the parties perceive preserving access to litigation to be value-enhancing compared to ex ante binding arbitration. This contrasts with widespread beliefs about arbitration's efficiency and with imposition of mandatory arbitration clauses in some standardized consumer transactions such as credit card and cellular phone contracts.

arbitration, empirical studies, contracts

Abstract:
Much of the blame for the current financial crisis is attributable to problems in the subprime mortgage market. In this Article we argue that changes in the nature of the mortgage contract make it both legally plausible and normatively desirable that subprime mortgages brokers be treated as securities broker-dealers for the purposes of the Securities Act of 1933 and the Securities and Exchange Act of 1934. Modern subprime mortgages are, in large part, investments that contain imbedded options, and are not subject to any alternative comprehensive regulatory regime. Thus, they should qualify as "notes" under the Securities Act definition and the Supreme Court's Reves test, and expose their brokers to Rule 10b-5 oversight. In the alternative, we argue that the emergence of securitization as the primary process by which mortgages are financed provides a second, independent analytical basis for our theory that subprime mortgage financings should be subject to securities law: Mortgage financings qualify for the protections of rules such as SEC Rule 10b-5 because they occur "in connection with the purchase or sale of a security," namely, the mortgage-backed security that is created and funded on the basis of the cash flows from the mortgagors' payments on their subprime mortgages.

Were the SEC to take control of subprime mortgages brokers, rules that forbid the sale of financial instruments to any person unless investing in those instruments is appropriate (suitable) to the investment needs and risk tolerance of that investor would come into play, oversight that would have avoided or greatly mitigated the current crisis. In describing what suitability would do for the mortgage market, we make a novel distinction between "product" and "transaction form" suitability in our analysis of the suitability rules. We argue that transaction form suitability is the appropriate legal theory to use when pursuing people who have unscrupulously sold subprime mortgages to unsophisticated investors. In closing, we discuss reasons why we believe the SEC has not tried to exert this authority to date, and address the likely result of a legal challenge in the event the SEC were to adopt our proposal by rule.

securities law, subprime, reves test, crisis, mortgage

Abstract:
We provide the first study of varying use of arbitration clauses across contracts within the same firms. Using a sample of 26 consumer contracts and 164 nonconsumer contracts from large public corporations, we compared arbitration clause use in consumer contracts with their use in the same firms' nonconsumer contracts. Over three-quarters of the consumer agreements provided for mandatory arbitration but less than 10% of the firms' material nonconsumer, nonemployment contracts included arbitration clauses. The absence of arbitration provisions in nearly all material contracts suggests that, ex ante, many firms value, even prefer, litigation over arbitration to resolve disputes with peers. The frequent use of arbitration clauses in the same firms' consumer contracts appears to be an effort to preclude aggregate consumer action rather than, as often claimed, an effort to promote fair and efficient dispute resolution. Other common features of civil litigation reform discussion, avoidance of juries and loser-pays attorney fee rules, find little support in the pattern of contractual terms we observe.

Arbitration, Contracts, Consumer

Abstract:
This paper presents an interest group theory of central bank independence. The theory is grounded in the concept of rent extraction. In the absence of an independent central bank, politicians can benefit in the short run by creating an unanticipated burst of inflation that unravels many interest group deals. The interest groups then have to return to the politicians to renegotiate the deals, and the politician can extract a portion of the rents as a price for renegotiation. However, while politicians can benefit from creating unanticipated inflation, they benefit even more by credibly precommiting not to inflate the currency ex post. If they do not inflate the currency ex post, they can obtain more in payments for their services ex ante, because the interest group or groups that are paying for the deal will not discount their upfront compensation by the risk that the deal will lack durability due to future inflation. It is not enough for a politician to promise not to create inflation in the future, because ex post, given the opportunity, self interested politicians may do so anyway. Thus the politician needs a mechanism for reliably precommiting not to engage in inflationary actions. The independent central bank is a relatively reliable (although not perfect) precommitment mechanism. Thus, self-interested politicians may favor independent central banks even though, in doing so, they relinquish the enormously important power of price level control. Politicians would even prefer for the independence of the central bank to be embedded in some durable (i.e., constitutional) fashion in order to tie their own hands against the possibility that at some future point they will be tempted to unravel all the previous deals by revoking the central bank's independence. The pronounced recent tendency of countries around the world to adopt more independent central banks may be due, in part, to the fact that political systems are moving in the direction of greater democracy and higher adherence to a rule of law, conditions that favor legal rent extraction strategies by political actors.

Abstract:
This paper considers a central puzzle of central bank independence: why politicians would agree to establish such a bank, when the consequence is giving up a substantial degree of control over the money supply and price levels. I suggest that politicians agree to establish independent central banks because it serves their interests to do so. Without an independent central bank in place, politicians have an incentive to create unexpected bursts of inflation that disrupt interest group deals previously negotiated. In the face of such inflation, the interest groups have to return to the politicians to obtain new deals, and the politician can extract rents as the price for supplying the desired legislation and regulation. However, politicians, ex ante, would prefer not to face the temptation to extract rents through inflation. The reason is that the interests groups know that the politicians face this temptation and accordingly discount the amounts they are willing to pay for political deals in the first place. With an independent central bank in place, politicians can provide the interest groups with assurances that they will not subsequently upset deals by creating inflation. The interest groups, in turn, are willing to pay more for the deal upfront, since they have reasonable confidence that it will be durable. Because politicians have a short time horizon, they prefer to tie their own hands by creating an independent central bank, since by doing so they can maximize rents in the short run. The paper conjectures that the growth of independent central banks over the past decade is due to the establishment of more effective legal regimes. If a country operates under a rule of law, politicians find it in their interest to extract rents through legal means rather than merely stealing them. They therefore favor independent central banks as effective devices for facilitating legal rent extraction.

Abstract:
Incentive awards to representative plaintiffs in class action cases have been the focus of recent law reform efforts and generated inconsistent case law. But little is known about such awards. This study of 374 opinions from 1993 to 2002 finds that awards were granted in about 28% of settled class actions. Rate of awards varied by case category as follows: consumer credit actions 59%, employment discrimination cases 46%, antitrust cases 35%, securities cases 24% (before the PSLRA limited awards), corporate and mass tort actions, less than 10%. The decision to grant an incentive award was associated with increased awards of attorney costs and expenses (our proxy for representative plaintiff costs) in relation to median class member recoveries and with the case being in federal court. When given, incentive awards constituted, on average, 0.16% of the class recovery, with a median of 0.02%. Award levels varied by case category. Employment discrimination cases had large incentive awards compared to other categories. Award size was associated with the case's costs and expenses, the class recovery amount, the median recovery per class member, the case's risk, and the presence of objection to the settlement. Awards exhibited a scaling effect; their percentage of the class recovery decreased as the class recovery increased. We examine the data in light of four hypotheses about the function of incentive awards: (1) reimbursing class representatives for non-pecuniary litigation costs; (2) rewarding class representatives for superior service; (3) facilitating self-interested behavior by class counsel; and (4) achieving proportionality between awards and other outcomes in the case. We find support for the reimbursement and proportionality hypotheses and weaker support for the attorney self-interest and reward-for-service hypotheses. We find little evidence of systematic abuse in incentive awards. Given the modest frequency and size of awards, and their possible benefits, case-by-case adjudication may be more appropriate than fixed legislative or judicial rules banning awards.

class actions, litigation, securities, tort

Abstract:
Legal scholars devote much attention to the incorporation puzzle - why corporations so frequently incorporate in Delaware. This paper suggests that focusing on the incorporation decision overlooks a broader but intimately related set of questions. Choosing Delaware as the incorporation situs is, effectively, a choice-of-law decision. Incorporating in Delaware selects Delaware law for (and authorizes Delaware courts to adjudicate) legal disputes about the allocation of a firm's governance authority. In this sense, the incorporation decision is similar to any setting in which a company selects a law or authorizes a dispute resolution forum. We study a data set of 412 merger and acquisition contracts contained as exhibits in SEC Form 8-K filings over a seven month period in 2002 to assess the decisions the parties have made regarding choice-of-law and choice-of-forum. Although these contracts frequently select Delaware law and Delaware as a forum, there is a relative "flight" from Delaware in this contractual setting. Delaware corporations choose Delaware law less than other corporations choose the law of their state of incorporation. Furthermore, many contracts specifying Delaware law did not specify Delaware as the litigation forum. Contracts designating Delaware law tend to choose Delaware as a litigation forum less than contracts that designate other states' laws tend to choose such states as a litigation forum. Delaware was the place of incorporation for 189 merger contracts; it was the choice of law for 132. With respect to forum selection, 115 contracts that designated a forum had Delaware corporate acquirers. Yet only 64 contracts specified Delaware as the litigation forum. In contrast, for example, New York had eight corporate acquirers and 45 contracts specifying that New York law governed. We investigate the determinants underlying these decisions about choice-of-law and forum selection. Regression results confirm the flight from Delaware law and forum.

Choice-of-law, Delaware, Choice-of-forum, corporate governance

Abstract:
This article offers a legal history of the northwest corner of 42nd Street and Fifth Avenue, the plot of land that, among other things, was the source of dispute in Meinhard v. Salmon, one of the leading business law cases in American history. Using the Meinhard case as a lens, the paper explores New York's changing ethnic, social, and economic environment - the rise and fall of industries, the booms and busts of business conditions, the dispersal and commercialization of landed estates, the influence of immigrants, the role of yachting, horse racing, art collecting and charitable work in establishing social standing, and the importance of family and heritage in the development of New York City during the late Nineteenth and early Twentieth Centuries.

Abstract:
In Eisen v. Carlisle & Jacquelin, the Supreme Court declared that federal courts may not conduct a preliminary inquiry into the merits of a suit in order to determine whether it may be maintained as a class action. This proscription - sometimes known as the Eisen rule - has become a pillar of class action practice, both under Federal Rule of Civil Procedure 23 and under state-court class action procedures. The rule can have a crucial influence on whether a case is certified as a class action - and, given the importance of certification, on the success or failure of the litigation.

This Article analyzes the proper scope of a court's inquiry into merits issues when ruling on motions to certify a class. Part I of the Article distinguishes three approaches to this question: strong-form rules that prohibit inquiries into the merits and require the court to accept as true the well-pleaded allegations in the complaint; weak-form rules that permit reasonable inquiries into the merits as relevant to certification and usually place burdens of production and persuasion on the plaintiff; and super-weak rules which permit or require the court to investigate the class's chances of success in the litigation and place burdens of production and persuasion on the plaintiff. Parts II-VI compare these rules with respect to the values of fidelity to law, accuracy in adjudication, fairness in judgments, fairness in settlements, and judicial economy. Part VII argues that weak-form rules are superior to the alternative approaches.

Abstract:
Legal scholars have focused much attention on the incorporation puzzle - why major firms so heavily favor Delaware as their chartering state. The choice of Delaware incorporation is effectively a decision to select Delaware law to control issues of corporate governance and (less reliably) to select Delaware courts to adjudicate disputes. In this sense the incorporation decision is similar to any contract in which parties select a governing law or designate a forum. This paper considers whether theories about Delaware corporate law apply to the broader market for commercial contracts. After describing how the preconditions for such a market were established during the last half of the Twentieth Century (through the increased enforceability of choice-of-law and forum selection clauses), the paper looks at empirical evidence about major commercial contracts. Although Delaware dominates the market for incorporations, New York is the leading supplier of law and forum in commercial contracts. The paper explores several explanations for New York's popularity.

Abstract:
This paper considers the legal and cultural meaning of female genital mutilation. The paper contrasts the meaning assigned to such procedures in Western culture with the meanings given the procedures in several African cultures. The paper illustrates that the social meaning of the ritual differs widely depending on the cultural context. The paper uses the case of female genital mutilation to explore the social construction of the Good. It argues that the concept of the Good is organized around certain key polarities: purity and pollution, health and harm, self and other, natural and unnatural, beauty and deformity, gender-appropriate and gender-inappropriate, order and chaos, good and bad, and true and false. The article demonstrates how the cultural meaning of female genital mutilation differs depending on the values a society assigns the procedure along these different dimensions.

Abstract:
Recent research has shown that large companies select New York law and New York courts to govern disputes under commercial contracts. Because these parties make choice-of-law and forum selection decisions before conflicts arise, there is reason to believe that their preference for New York reflects an effort to select efficient terms. This paper compares New York's contract law with that of its most natural competitor, California. It turns out that New York strictly enforces bargains and displays little tolerance for efforts to rewrite deals ex post. California, in contrast, is more willing to reform contracts for reasons of fairness, equity, morality or public policy. The revealed preferences of sophisticated parties support arguments by Schwartz, Scott and others that formalistic rules offer superior value for the interpretation and enforcement of commercial contracts.

Abstract:
This paper considers Europe's experiment with aggregate litigation in light of American experience. European thinking on the topic appears to have reached consensus on two points: first, aggregate litigation will soon be the norm for Europe; and second, whatever form European aggregate litigation takes, it will not replicate American class action litigation with its domination by entrepreneurial plaintiffs' attorneys. We first examine four sources of dissatisfaction with the class action to assess which are meritorious, which are ill-founded, and which derive from a deeper debate over whether or not there should be private legal accountability for consumer claims. Drawing on America's long history of collective enforcement, we then ask whether Europe will adopt the incentives and institutional arrangements necessary to make aggregate litigation an effective remedy. Our concern is that Europe's revulsion at accepting the reality of legal enforcement as an entrepreneurial activity may leave the incipient reforms without the necessary agents of implementation.

Abstract:
This paper considers the legal and cultural meaning of circumcision, the most commonly performed operation on men in the United States. The paper explores three periods of American history in which circumcision has had very different meanings. Before the turn of the Twentieth Century, circumcision was uncommon and generally disapproved. During the first part of this century, and until recently, the operation became increasingly frequent - first as a cure for disease (especially masturbation), and later as a routine prophylactic measure performed on newborn boys. Beginning in the 1980s, an anti-circumcision movement has developed in the United States and elsewhere in the world that attempts to reverse the positive cultural meanings the operation achieved earlier in the century. The paper uses the case of circumcision to explore the social construction of the Good. It argues that our culture's concept of the Good is organized around certain key polarities: purity and pollution, health and harm, self and other, natural and unnatural, beauty and deformity, gender-appropriate and gender-inappropriate, order and chaos, good and bad, and true and false. The article demonstrates how the cultural meaning of circumcision changed along each of these dimensions during the last hundred years.

Abstract:
This paper is an inquiry into the proper standard for dealing with conflicts of interest in class actions. It proposes a simple approach to guide analysis: a conflict of interest should be deemed impermissible if a reasonable plaintiff, operating under a veil of ignorance as to his or her role in the class, would refuse consent to the arrangement. The standard proposed here can be termed a "hypothetical consent" principle. It substitutes a thought experiment in which consent is given or withheld under stylized conditions for the actual consent that is required in ordinary litigation. By placing the reasonable plaintiff behind a veil of ignorance as to his or her position in the class, the hypothetical consent idea allows representation to go forward even when some class members will be relatively better off and some worse off as the case develops. This approach can provide useful guidance both for the interpretation of counsel's duties under applicable rules of professional responsibility and also for courts deciding whether to certify class actions or approve class action settlements.

Abstract:
Nonpecuniary settlements - agreements in which consideration other than immediate cash payments are given to class action plaintiffs in exchange for a release of liability - have become controversial methods for resolving large-scale litigation and thereby, in theory, deterring corporate misconduct. Such settlements, it is claimed, enrich attorneys but provide no substantial benefit either for the public or for the class members who have suffered harm. This study provides the first empirical and analytical investigation specifically focusing on such settlements. We categorize nonpecuniary settlements into five general types: (1) coupons, (2) securities, (3) monitoring, (4) reverter funds, and (5) fluid recoveries. We demonstrate that nonpecuniary settlements can sometimes serve the interests both of the plaintiffs and the public, although in other cases such settlements will be socially undesirable. We identify a number of features of nonpecuniary settlements that tend to enhance their value or to substantiate the inference that such settlements are fair, adequate and reasonable from the standpoint of class members. Finally, we examine a data set of 127 class action settlement notices published in the New York Times from 1993 to 1997, in order to situate the topic within the overall context of class action litigation.

Abstract:
This paper provides a theoretical and empirical analysis of "nonpecuniary" class action settlements -- coupons, monitoring arrangements, securities issuance, reverter funds and fluid recoveries. Because of valuation problems, these settlements can be criticized because they facilitate deals between plaintiffs' attorneys and defendants, reducing the benefits available to class members. On the other hand, there are potential economic benefits from these settlements. Coupon settlements conserve the difference between wholesale and retail prices; monitoring settlements offer potential economies in providing insurance; securities settlements and reverter funds address problems of potential insolvency of the defendant, and fluid recoveries may optimally deter wrongdoing in cases where compensatory damages would not. We argue that courts engaged in fairness review of nonpecuniary settlements should apply the following test: "Is the settlement under consideration as good or better for members of the class, with a range of reasonable error, than what realistically could be expected in a cash settlement?" We support our analysis with a review of 127 class action settlement notices taken from the New York Times, and by a nationwide survey of class action attorneys' fees rules.

Abstract:
This article proposes a simple and coherent approach to judicial review of class action settlements. Specifically, we propose that for questions going to the adequacy of a settlement, where no warning signals of fraud or collusion are found, the court should act relatively deferentially by employing a lenient standard of scrutiny and approving a settlement if it has a rational basis. An intermediate level of scrutiny should apply when the settlement presents facial issues that implicate the fairness of the settlement. Such facial issues include the allocation of settlement proceeds among subgroups in a class, the presence of coupon-type relief, "shotgun" settlements occurring very early in the litigation, and settlements in overlapping class actions. In settlements with one or more of these characteristics, if the initial inquiry raises concerns, the court should demand a well-reasoned explanation for the choices made. Finally, where the components of a settlement present a direct conflict between the interests of class counsel and those of the class issues, such as issues related to attorneys' fees, courts should employ exacting scrutiny and require convincing evidence that the proposal is reasonable.

judicial review, class action settlements

Abstract:
This article proposes a simple approach to judicial review of class action settlements. The key is to recognize that courts should apply different degrees of scrutiny for different issues depending on the respective competence of the court and class counsel. For questions going to the adequacy of the settlement, where no warning signals of fraud, collusion or inadequate bargaining leverage are found, the court should employ lenient scrutiny and approve the settlement if it has a rational basis. An intermediate level of scrutiny should apply to issues implicating the fairness of the settlement, including the allocation of settlement proceeds among subgroups in the class, the presence of coupon-type relief, "shotgun" settlements occurring very early in the litigation, and settlements in overlapping class actions. Here, if the initial inquiry raises concerns, the court should demand a well-reasoned explanation for the choices made. For the issue of attorneys' fees and other questions presenting a direct conflict between the interests of class counsel and those of the class, courts should employ exacting scrutiny and require convincing evidence that the proposal is reasonable.

Abstract:
This paper considers the law and economics of legal ethics rules in certain states that purport to prohibit an attorney from advancing costs and expenses of litigation with repayment by the client contingent on success of the case. The paper argues that these rules, to the extent they are otherwise effective, should not be enforced in the context of private securities litigation brought under the Private Securities Litigation Reform Act of 1995.

litigation, expenses, ethics, class actions

Abstract:
In Tellabs, Inc. v. Makor Issues & Rights, Ltd., the Supreme Court held that a securities fraud complaint will survive a motion to dismiss only if a reasonable person would deem the inference of [culpable state of mind] cogent and at least as compelling as any opposing inference one could draw from the facts alleged. This paper analyzes how the Tellabs test may be applied, identifies questions left open under the decision, and discusses broader implications of the opinion and the PSLRA. Among other things, the paper suggests that the PSLRA's heightened pleading rules have deformed the motion to dismiss to the point where it now operates in securities fraud cases as a hybrid falling somewhere in between the traditional Rule 12(b)(6) and Rule 56 summary judgment procedures.

Abstract:
We study jury trial waivers in a data set of 2,816 contracts contained as exhibits in Form 8-K filings by reporting corporations during 2002. Because these contracts are associated with events deemed material to the financial condition of SEC-reporting firms, they likely are carefully negotiated by sophisticated, well-informed parties and thus provide presumptive evidence about the value associated with the availability of jury trials. Only a small minority of contracts, about 20 percent, waived jury trials. An additional nine percent of contracts had arbitration clauses that effectively preclude jury trials though the reason for arbitration clauses need not specifically relate to juries. We explore three groups of factors to explain the pattern of jury trial waivers: (1) contract-specific factors: the subject matter of a contract, a measure of its standardization, choice of law, and choice of forum, (2) contracting-party factors: domestic vs. international status, place of business, place of incorporation, attorney locale, and industry, and (3) factors external to the contracts and parties: perceptions of local jury fairness in the forum specified in the contract and the relative length of jury and bench trial queues in that forum. Contract-type is significantly associated with jury trial waivers. For example, over 50 percent of security agreements and over 60 percent of credit commitments waived jury trials. In contrast, only five percent of employment contracts, two percent of bond indentures, and 3.5 percent of pooling service agreements waived jury trials. Choice of forum, greater contract standardization, and perceived fairness of juries are significantly associated with jury trial waivers. Over 80 percent of the contracts designating Illinois as a forum contained jury trial waivers whereas less than half the contracts designating New York as a forum, and only about one-third of the contracts designating California, Texas, or Florida as a forum contained waiver clauses. Jury trial waivers were not more common in international contracts. Our results suggest that, contrary to a widespread perception about the alleged inadequacies of juries in complex business cases, sophisticated actors may perceive that juries often add value to dispute resolution.

Juries, Contracts, Trials, Corporations, Bivariate Probit

Abstract:
We study choice of law and choice of forum in a data set of 2,882 contracts contained as exhibits in Form 8-K filings by reporting corporations over a six month period in 2002 for twelve types of contracts and a seven month period in 2002 for merger contracts. These material contracts likely are carefully negotiated by sophisticated parties who are well-informed about the contract terms. They therefore provide evidence of efficient ex ante solutions to contracting problems. In prior work examining merger contracts, acquiring firms incorporated in Delaware tended to select Delaware law or a Delaware forum to govern disputes under the merger agreements less frequently than firms in other states (New York in particular) specified the law or forum of those states. For the broader variety of contracts analyzed here, the contracting parties rarely opt for Delaware law other than for merger contracts and contracts establishing Delaware business trusts. New York law is the favored choice, with New York law chosen in 46 percent of the contracts and Delaware law, the second most frequent selection, chosen in 15 percent of the contracts. New York law was overwhelmingly favored for financing contracts, but was also preferred for most other types of contracts. With respect to choice of forum, the major finding is that a litigation forum was specified only for 39 percent of the contracts. Among those 39 percent of contracts, New York is the favored forum, accounting for 41 percent of the choices, with Delaware a distant second and accounting for 11 percent of the forum choices. When a forum is specified it usually matches the contract's choice of law. We also explore the decision to designate a forum, mismatches between choice of law and choice of forum, and whether parties designate an exclusive litigation forum. Overall, New York law plays a role for major corporate contracts similar to the role Delaware law plays in the limited setting of corporate governance disputes.

Abstract:
State Supreme Courts (SSCs) exercise two major sources of authority: mandatory and discretionary jurisdiction. This article assesses 7,055 SSC cases decided with written opinions in 2003 to provide the first comprehensive study of the relation between jurisdictional source and SSC performance. Approximately half the cases were discretionary and half were mandatory. Jurisdictional source is associated with several important aspects of SSC behavior. Aggregated across states, 51.6 percent of discretionary jurisdiction cases resulted in reversal compared to 28.1 percent for mandatory cases. Dissent rates also vary by jurisdictional source: 26.7 percent of discretionary cases generated at least one dissenting opinion compared to 18.8 percent of mandatory cases. Striking interstate variation overlays the mandatory-discretionary distinction. Reversal rates in SSC discretionary jurisdiction cases ranged from 88 percent in Texas to 31 percent in Ohio. Across courts with substantial mandatory jurisdiction, reversal rates ranged from 68 percent in Arizona to 13 percent in Florida and 9 percent in the Texas Court of Criminal Appeals. These results are robust to models that account for state and case category effects. Surprisingly, after controlling for state and case category, discretionary case opinions are short than mandatory case opinions. Our evidence suggests that studies of SSC outcomes, dissent patterns, judicial policy preferences, and other characteristics should take account of jurisdictional source.

courts, jurisdiction, selection effects

Abstract:
This article uses three recent multi-district litigations (MDLs) that produced massive settlements - Guidant ($240 million), Vioxx ($4.85 billion), and Zyprexa ($700 million) - to study the emerging quasi-class action approach to MDL management. The approach has four components: (1) judicial selection of lead attorneys; (2) judicial control of lead attorneys' compensation; (3) forced fee transfers from non-lead lawyers to cover lead attorneys' fees; and (4) judicial reduction of non-lead lawyers' fees to save claimants money. These widely used procedures have serious downsides. They make lawyers financially dependent on judges and, therefore, loyal to judges rather than clients. They compromise judges' independence by involving them heavily on the plaintiffs' side and making them responsible for plaintiffs' success. They allocate monies in ways that likely over-compensate some attorneys and under-pay others, with predictable impacts on service levels. They also lack needed grounding in substantive law because the common fund doctrine, which supports fee awards in class actions, does not apply in MDLs. Academics have not previously noted these shortcomings; this is the first scholarly assessment of the quasi-class action approach.

This article also proposes an alternative method of MDL management. It recommends the creation a plaintiffs' management committee (PMC) composed of the attorney or attorney-group with the most valuable client inventory, as determined objectively by the trial judge. The PMC, which would have a large interest in the success of an MDL, would then select and retain other lawyers to perform common benefit work (CBW) for all claimants and monitor the lawyers' performance. The new approach would thus use micro-incentives to organize the production of CBW in MDLs rather than judicial control and oversight. The court would stand back from the process, exercising only a limited backup authority to prevent abuses. If enacted as a statute, the proposal would restore judges' independence, preserve lawyers' loyalties, provide the requisite legal foundation for fee awards, and encourage the fairer, more efficient, and more appropriate representation of claimants in MDLs.

Abstract:
This paper considers the cultural meaning of masturbation and spermatorrhoea (wet dreams). It explores the more than 200-year-long campaign against "self-pollution" by examining the meanings assigned to the practice along a number of dimensions that collectively contribute to society's construction of the Good and the Bad: : purity and pollution, health and harm, self and other, natural and unnatural, beauty and deformity, gender-appropriate and gender-inappropriate, order and chaos, good and bad, and true and false. The article identifies several overlapping frameworks that norm entrepreneurs used to stigmatize masturbation: the religious, medical, and sociological models. Each of these models offered a theory for the origin, development, and treatment of the conditions. The paper concludes with some conjectures about the value the campaign against masturbation may have offered in terms of displacing social anxieties, especially for physicians, moral conservatives, and early feminists.

Abstract:
The article examines the extent to which child support payments should be adjusted (either upward or downward) to reflect the frequency of visitation by noncustodial parents. The article argues in favor of California's rule, which automatically adjusts support obligations to reflect the amount of time spent with both parents. The California approach gives noncustodial parents (usually fathers) an incentive to remain involved in the lives of their children, and penalizes parents for opting out. The California rule thus works to deter paternal absence and the associated bad effects on children: depression, insecurity, substance abuse, impoverishment, crime, delinquency, premature sexuality, teen pregnancy, unemployment, underemployment, and poor educational performance. California's approach is also more equitable and better grounded in moral principles. It is likely to benefit custodial parents by providing them with economic help when the noncustodial parent opts out, and relieving them of financial and physical burdens of caretaking when the noncustodial parent remains involved. It may benefit women by enhancing their financial situation and by contributing to a cultural climate that is respectful of women's roles. It is likely to enhance satisfaction with the law and to increase compliance with child support orders.

Abstract:
The traditional protection against undesirable legal representation is the attorney's independence from the client backed by the threat of withdrawal. That protection, however, has eroded as the legal services market evolved from club to competitive forms of organization. The problems of reduced lawyer independence have come to the fore as a result of the share market bubble of 1995-2000 and corporate scandals that to one degree or another were related to the bubble economy: Enron, WorldCom, Adelphia, and HealthSouth being prime examples. If counsel had exercised a higher degree of independence, some of the harms might have been mitigated or avoided. Having identified the transition from club to competitive organization and the bubble economy as two principal economic developments that have impacted attorney independence, this paper addressed several proposals for reform: up-the-ladder reporting, noisy withdrawal, enhanced permission to reveal client confidences, and changes in the self-identity of the profession. An awareness of the background economic developments provides helpful insights into the policy arguments for and against these proposed changes.

Abstract:
This paper identifies an important but previously unrecognized systemic risk in financial markets: intellectual hazard. Intellectual hazard, as we define it, is the tendency of behavioral biases to interfere with accurate thought and analysis within complex organizations. Intellectual hazard impairs the acquisition, analysis, communication and implementation of information within an organization and the communication of such information between an organization and external parties. We argue that intellectual hazard was a cause of the Crisis of 2008 and suggest that this risk may be an important factor in all financial crises. We offer tentative suggestions for reforms that might mitigate intellectual hazard going forward.

Abstract:
This paper considers the choice between an all-or-nothing rule (AON) and a proportionate damages rule (PD) in civil litigation. Under AON, a prevailing plaintiff receives a judgment equal to his entire damages. Under PD, damages are reduced to reflect uncertainty. For example, if the trier of fact found that there was a seventy-five percent chance that the defendant is liable, the judgment would equal seventy-five percent of the plaintiff's damages. Using a moral hazard model that takes into account defendants' decisions to comply with legal rules, evidentiary uncertainty, and settlement, we show that AON usually maximizes the rate of compliance, although it may result in a higher level of litigation. This, in turn, provides an efficiency rationale for the ubiquity of AON in the legal system.

Abstract:
This paper investigates the corporate law background of the Necessary and Proper Clause. It turns out that corporate charters of the colonial and early federal period bristled with similar clauses, often attached to grants of rulemaking power. Analysis of these corporate charters suggests that the Necessary and Proper Clause does not create independent lawmaking competence; does not confer general legislative power; does not grant Congress unilateral discretion to determine the scope of its authority; requires that there be a reasonably close connection between constitutionally recognized ends and the legislative means chosen to accomplish those ends; and requires that federal law may not, without adequate justification, discriminate against or otherwise disproportionately affect the interests of particular citizens vis-à-vis others.

Abstract:
The Second Annual Conference on Empirical Legal Studies will be held at New York University School of Law in New York. The conference will feature original empirical and experimental legal scholarship by leading scholars from a diverse range of fields.

The attached downloadable pdf includes further details on the conference and submission instructions.

Abstract:
Credit Risk Transfer (CRT) instruments are burgeoning. Prof. Zimmerman's paper provides insights into this important market, which on the one hand can enhance social wealth by distributing credit risk to more efficient risk bearers and on the other hand carries along quite some risks. The intransparency of CRT instruments and their highly leveraged capital positions could lead to an inability to cope with a crisis. Prof. Zimmerman highlights these risks, nevertheless refrains from calling for more regulation. The international financial system has been remarkably robust and crises have been more often than not results of ill-considered attempts at regulation.

Credit Risk Transfer, Hedge Funds

Abstract:
This paper presents a simple model of takeover regulation in a federal system. The theory has two parts. First, the model predicts that the rules applicable at more general political levels will be more favorable to takeover bids than will the rules applicable at local levels. The reason is that unlike bidders, who do not know ex ante where they will find targets, targets can concentrate their political activities knowing that the law of their jurisdiction will apply to any attempt to take them over. On the other hand, at more general political levels this advantage for target firms disappears, so the rules are expected to be less target-friendly. This is in fact the pattern we observe both in the United States and the European Union. Second, the model predicts that rules on takeovers will reflect the degree of concern that targets have about potential hostile bids. Where firms are well-protected against unfriendly takeovers – for example, in jurisdictions where companies are under family control – takeover regulation is likely to be less target-friendly than in jurisdictions where potential targets are more exposed to a hostile acquisition. This pattern is also observed in takeover regulation.

Abstract:
Judicial impact studies have generally found widespread compliance by lower courts. Often, however, these studies employ relatively insensitive measures of compliance, limit their focus to compliance with Supreme Court precedent, and only occasionally examine the impact of judicial decisions on the ultimate consumers of those rulings - the members of society who are subject to them. Significant questions thus remain, such as whether and to what extent lower courts in fact comply with precedent and what if any role fear of reversal plays in compliance. To address these gaps, we use regression analysis to examine how the district courts in the Second Circuit responded to the decision of the Court of Appeals in Goldberger v. Integrated Resources, Inc., a case that mandated strict scrutiny by trial court judges of attorneys' fee applications in class actions. Contrary to what might be expected, Goldberger is not correlated with a general decline in fee awards or fee requests or increased judicial scrutiny of requests. Instead, we find that as settlement size increases, both fee requests and fee awards rise at a slower rate in the cases subject to Goldberger while judicial scrutiny increases. As large settlements are the most likely to be appealed, this finding supports the proposition that compliance is tied to the probability of appeal and reversal.

Abstract:
This article proposes the preliminary judgment as a means for facilitating the settlement of legal disputes. A preliminary judgment is simply a tentative judicial assessment of the merits of a case or any part of a case, based on the same sorts of information that the courts already consider on motions for summary judgment. The difference between a preliminary judgment and a summary judgment is that the court, in a preliminary judgment, would not be limited to deciding issues with which no reasonable jury could disagree. Instead, the court would provide its own judgment on the merits of the case based on the information provided by the parties. A preliminary judgment, once given, would convert into a final judgment after the expiration of a reasonable period of time. However, the losing party would have the right to object prior the expiration of the period (with or without explanation), in which case the judgment would be vacated and the case would proceed according to ordinary rules of procedure. Preliminary judgments would increase prospects of success in settlement bargaining by providing litigants with a credible evaluation of case value. Preliminary judgments could offset settlement-defeating party optimism, anchor the parties' discussions on realistic outcomes, focus attention on basic strategic questions, counteract the danger that attorneys will distort settlements, and enhance the willingness of litigants to accept the outcome. Because preliminary judgments would be announced publicly, moreover, they would provide information to guide future conduct. In point of fact, judges already communicate their provisional views on the merits through a variety of pretrial procedures. The preliminary judgment would represent a more direct, honest and systematic approach to practices which until now have been employed in less transparent ways.

Abstract:
This paper proposes that Delaware could improve on existing, ineffective judicial mechanisms enforcing the duty of care by upgrading the ability of Delaware Chancery Court judges to comment on the quality of board decision processes. I suggest two possible reforms. First, Delaware Chancery Court judges could, in their discretion, award attorneys’ fees to unsuccessful plaintiffs in duty of care cases. Second, Delaware could authorize judicial inquiries into credible allegations of gross negligence in board decisions.

Abstract:
This paper analyzes the Eden narrative (Genesis 2:4b-3:24) as a philosophical account of the origins and extent of political obligation and the consequences of its breach. The strong (but not unlimited) form of obligation identified in the text would have been congenial to the interests of the leaders under whose auspices the narrative appears to have been compiled and preserved.

Abstract:
Judicial opinions map events into narrative. Errors in mapping are inevitable but are exacerbated when the adversary system breaks down. This paper explores these problems of narrative distortion through an analysis of corporate charitable giving cases: Dodge v. Ford Motor Co., A.P. Smith Co. v. Barlow, and Shlensky v. Wrigley. Each of these cases contains evidence of significant distortion in the mapping process. In Dodge, the distortion was due to the fact that neither party wanted to acknowledge what was really going on. In A.P. Smith, the evidence suggests that the litigation was collusive and that all parties, including the judge, were in on the scam. In Wrigley, the opinion may have had more to do with Chicago politics than with the accurate presentation of the facts. I conclude with tentative thoughts about the implications of narrative distortion in American law.

Abstract:
We report on a comprehensive data base of eighteen years of published opinions (1993-2008, inclusive) on settlements in class action and shareholder derivative cases in both state and federal courts. An earlier study, covering 1993-2002, revealed a remarkable relationship between attorneys’ fees and the size of class recovery: regardless of the methodology for calculating fees ostensibly employed by the courts, the overwhelmingly important determinant of the fee was simply the size of the recovery obtained by the class. The present study, which nearly doubles the number of cases in the data base, powerfully confirms that relationship. Fees display the same relationship to class recoveries in both data sets and neither fees nor recoveries materially increased over time. Although the size of the class recovery dwarfs other influences, significant associations exist between the fee amount and both the fee method used and the riskiness of the case. We found no robust evidence of significant differences between federal and state courts. The strong association between fee and class recovery persists in cases with recoveries of $100 million or more, as do the significant associations between fee level and fee method and risk. Fees were not significantly affected by the existence of a settlement class, the presence of objectors, or opt outs from the class. Courts granted the requested fee in over 70% of the cases, with the Second Circuit granting the requested amount least often. In cases in which the requested fee was not awarded, the mean fee was 68% of the requested amount. Fees and costs exhibit scale effects with the percent of each decreasing as the class recovery amount increased. Costs are strongly associated with hours expended on the case.

Attorney Fees, Class Actions, Litigation

Abstract:
International law-making by sub-national actors and regulatory networks of bureaucrats has come under attack as lacking in accountability and legitimacy. Global administrative law is emerging as an approach to understanding what international organizations and national governments do, or ought to do, to respond to the perceived democracy deficit in international law-making. This article examines the Basel Committee on Banking Supervision, a club of central bankers who meet to develop international banking capital standards and to develop supervisory guidance. The Basel Committee embodies many of the attributes that critics of international law-making lament. A closer examination, however, reveals a structure of global administrative law inherent in the Basel process that could be a model for international law-making with greater accountability and legitimacy.

global administrative law, banking, Basel Committee, capital standards

Abstract:
International law-making by sub-national actors and regulatory networks of bureaucrats has come under attack as lacking in accountability and legitimacy. Global administrative law is emerging as an approach to understanding what international organizations and national governments do, or ought to do, to respond to the perceived democracy deficit in international law-making. This article examines the Basel Committee on Banking Supervision, a club of central bankers who meet to develop international banking capital standards and to develop supervisory guidance. The Basel Committee embodies many of the attributes that critics of international law-making lament. A closer examination, however, reveals a structure of global administrative law inherent in the Basel process that could be a model for international law-making with greater accountability and legitimacy.

Abstract:
Study of two comprehensive class action case data sets covering 1993-2002 shows that the amount of client recovery is overwhelmingly the most important determinant of the attorney fee award. Even in cases in which the courts engage in the lodestar calculation (the product of reasonable hours and a reasonable hourly rate), the client's recovery generally explains the pattern of awards better than the lodestar. Thus, the time and expense of a lodestar calculation may be wasteful. We also find no robust evidence that either recoveries for plaintiffs or fees of their attorneys increased over time. The mean fee award in common fund cases is well below the widely quoted one-third figure, constituting 21.9 percent of the recovery across all cases for a comprehensive data set of published cases. A scaling effect exists: fees constitute a lower percent of the client's recovery of the client's recovery increases. Fees are also correlated with risk: the presence of high risk is associated with a higher fee, while low-risk cases generate lower fees. Fees as a percent of class recovery were found to be higher in federal than state court. The presence of "soft" relief (such as injunctive relief or coupons) has no material effect on the fee, regardless of whether the soft relief was included in the quantified benefit for the class used as the basis for computing the attorney fee. The study also addressed costs and expenses. Like fees, these displayed significant scale effects. The paper proposes a simple methodology by which courts can evaluate the reasonableness of fee requests.

fees, class actions

Abstract:
Viewed against the backdrop of European company law generally, the U.K. and U.S. systems of corporate governance are remarkably similar. However, there are several salient differences between the system, including the fact that the U.K. has a more robust and less regulated takeover market than the U.S. This paper explains the differences as a function of politics. In the United States, where corporate law is dominated by state governments, the political forces aligned against hostile takeovers are quite potent, generating legislation and judicial decisions that have suppressed takeover activity. In the United Kingdom, with a more unitary system, the political forces play out differently, and the system accordingly generates rules more accommodating to unfriendly takeovers.

Takeovers, Corporate Governance, Politics, Comparative Law

Abstract:
This paper presents an interest group theory of central bank independence. The theory is grounded in the concept of rent extraction. In the absence of an independent central bank, politicians can benefit in the short run by creating an unanticipated burst of inflation that unravels many interest group deals. The interest groups then have to return to the politicians to renegotiate the deals, and the politician can extract a portion of the rents as a price for renegotiation. However, while politicians can benefit from creating unanticipated inflation, they benefit even more by credibly precommitting; to inflate the currency ex post. If they do not inflate the currency ex post, they can obtain more in payments for their services ex ante, because the interest group or groups that are paying for the deal will not discount their upfront compensation by the risk that the deal will lack durability due to future inflation. It is not enough for a politician to promise not to create inflation in the future, because ex post, given the opportunity, self interested politicians may do so anyway. Thus the politician needs a mechanism for reliably precommiting not to engage in inflationary actions. The independent central bank is a relatively reliable (although not perfect) precommitment mechanism. Thus, self-interested politicians may favor independent central banks even though, in doing so, they relinquish the enormously important power of price level control. Politicians would even prefer for the independence of the central bank to be embedded in some durable (i.e., constitutional) fashion in order to tie their own hands against the possibility that at some future point they will be tempted to unravel all the previous deals by revoking the central bank?s independence. The pronounced recent tendency of countries around the world to adopt more independent central banks may be due, in part, to the fact that political systems are moving in the direction of greater democracy and higher adherence to a rule.

Abstract:
The comparative analysis of civil procedure examines dispute-resolution systems from different jurisdictions, with an eye toward identitying symilarities and differences, enhancing the understanding of particular systems, encouraging law reform, and facilitating harmonization. To date, comparative civil procedure has not drawn extensively from the literature on the economic analysis of procedural rules and methods. Yet economics has much to offer the comparative proceduralist. This paper models the trade-off between substance and procedure, and places different procedural systems in the model space. Systems such as the United States, which are procedurally intensive, may fail to achieve the optimum trade-off because too many resources are allocated to the effort to arrive at a correct result. Systems such as France, which are procedurally streamlined, may err in the other direction. Some systems may be inefficient in both senses; for example, they may utilize costly procedures that do not increase the likelihood of a substantively accurate result. This paper provides a simple scheme for analyzing and comparing procedural systems across countries.

Abstract:
Viewed against the backdrop of European company law generally, the U.K. and U.S. systems of corporate governance are remarkably similar. However, there are several salient differences between the system, including rules on derivative litigation, and those on corporate takeovers. The U.K. has a new robust and less regulated takeover market than the U.S., while the United States is more permissive towards derivative litigation. This paper explains the differences as a function of politics. In the United States, where corporate law is dominated by state governments, the political forces aligned against hostile takeovers are quite potent, generating legislation and judicial decisions that have suppressed takeover activity. In the United Kingdom, with a more unitary system, the political forces play out differently, and the system accordingly generates rules more accommodating to unfriendly takeovers. With respect to derivative litigation, the differences stem largely from the political influence of the organized bar. Because the U.K. system does not recognize contingency fees, there is little constituency in the organized bar pushing for liberalization in the rules governing derivative litigation. In the United States, in contrast, the "common fund" doctrine permitting attorney compensation out of the amounts generated for the benefit of the corporation has created a strong interest group within the organized bar that favors a relatively liberal scope for the remedy.

Abstract:
This paper examines contemporary Japanese financial regulation through the prism of the catastrophic failure of Japan's home mortgage lending ("jusen") companies. The jusen problem is a matter of considerable practical importance and theoretical interest. Directly at stake is as much as $130 billion in unrecoverable loans held by virtually every sector of the Japanese financial industry. On a theoretical level, the creation and resolution of the jusen problem is one of the most striking examples of regulatory failure, intense political and bureaucratic activity, strategic interest group bargaining, and large-scale dispute resolution in Japanese history.We model Japanese regulatory interaction as a network of interrelated insitutions that facilitate coordinated public-private decisionmaking -- a system of financial governance we label a "regulatory cartel." As developed more fully in the paper, a regulatory cartel is an interlinked system for cooperative decisionmaking and enforcement among the public and private sectors, which operates according to reasonably well understood procedural and substantive rules, and which has as its purpose and effect the control of entry, production, and price, not only within specified industries but also across industrial sectors.The paper explains the jusen problem as an outgrowth of the incentives generated by this regulatory cartel, providing an account of the factors that led to this financial debacle and documenting the extraordinary steps taken to resolve the problem. The paper concludes that patterns of existing Japanese regulation are unsustainable, because the regulatory cartel does not function well in periods of low economic growth or where actors must divide up "bads" such as economic losses and political opprobrium. The jusen matter thus illustrates how longstanding patterns of regulatory interaction in Japan are changing in response to changes in the economic and political environments.

Abstract:
This paper models the ethical rules applicable to attorney conflicts of interest as default terms for the attorney-client relationship which the legal system supplies in the absence of complete contracting by the parties. Following an approach which is standard in the literature, we model the attorney-client relationship as an agency relationship characterized by large information and monitoring difficulties. We conclude that, in general, a regime of granting the client the right to bar subsequent, conflicting representation of other parties by the attorney, subject to ex post renegotiation by the attorney and client, represents an optimal approach to the problem. Economic theory predicts, however, that there should be a threshold of harm to the client, below which the attorney should be allowed to represent another party without obtaining the first client's consent. In general, the ABA Model Code of Professional Responsibility and Model Rules of Professional Conduct adopt a regime of conflicts regulation that is quite consistent with economic theory. We suggest that the bar has an incentive to adopt efficient rules in this area because its interests are closely aligned with the public's: both have an interest in facilitating efficient contracting between attorney and client -- the bar, to increase profits; the public, to reduce costs.