The Curious Problem of Short Against the Box
Posted: 14 Mar 1997
Date Written: March 1997
This paper examines the Clinton Administration proposal to treat a short against the box (and other similar transactions) as a realization event. The paper draws three conclusions. First, traditional analysis, for example that based on Haig-Simons notions of income or horizontal and vertical equity, cannot resolve whether the proposal would produce a net welfare gain. Second, the proposal might produce an efficiency gain, although substantial (and difficult) empirical work is needed to verify the claim. In particular, the proposal would increase realizations but also increase the cost of lock-in. The size of these changes must be determined and translating these changes into social welfare costs requires better models of stock trading than are currently available. Third, the administrative problems with the proposal (or any proposal of this sort) are substantial and raise questions about whether it should be adopted at all.
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