The Tobacco Deal

Nuffield College, University of Oxford, Department of Economics Working Paper No. 1998-W15&147

62 Pages Posted: 5 Apr 1999

See all articles by Paul Klemperer

Paul Klemperer

University of Oxford - Department of Economics; Centre for Economic Policy Research (CEPR)

Jeremy Bulow

Stanford University; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: November 1998

Abstract

We analyse the major economic issues raised by the 1997 Tobacco Resolution and the ensuing proposed legislation that were intended to settle tobacco litigation in the United States. By settling litigation largely in return for tax increases, the Resolution was a superb example of a "win-win" deal. The taxes would cost the companies about $1 billion per year, but yield the government about $13 billion per year, and allow the lawyers to claim fees based on hundreds of billions in "damages". Only consumers, in whose name many of the lawsuits were filed, lost out.

Though the strategy seems brilliant for the parties involved, the execution was less intelligent. We show that alternative taxes would be considerably superior to those proposed, and explain problems with the damage payments required from the firms, and the legal protections offered to them.

We argue that the legislation was not particularly focused on youth smoking, despite the rhetoric. However, contrary to conventional wisdom, youth smokers are not especially valuable to the companies, so marketing restrictions are a sensible part of any deal. The individual state settlements set very dangerous examples which could open up unprecedented opportunities for collusion throughout the economy, and the multistate settlement of November 1998 is equally flawed.

The fees proposed for the lawyers (around $15 billion) and the equally remarkable proposed payoff for Liggett (perhaps $400 million annually, for a company with a prior market value of about $100 million) also set terrible examples.

We conclude with some views about how public policy might do better.

JEL Classification: L66, I18, K13, L41, H25

Suggested Citation

Klemperer, Paul and Bulow, Jeremy I., The Tobacco Deal (November 1998). Nuffield College, University of Oxford, Department of Economics Working Paper No. 1998-W15&147. Available at SSRN: https://ssrn.com/abstract=158328 or http://dx.doi.org/10.2139/ssrn.158328

Paul Klemperer (Contact Author)

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Jeremy I. Bulow

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