NATIONAL BUREAU OF ECONOMIC RESEARCH, INC.

 

Regulation and Litigation Meeting

 

Organizer:  Andrei Shleifer

 

October 24, 2007

 

National Bureau of Economic Research

1050 Massachusetts Avenue

Cambridge, Massachusetts

 

Approximate Agenda for Oct 24th.   There is no “tight” schedule.  All times depend on how much discussion participants want to have.

 

8:45

Continental breakfast

 

 

9:00-9:15

Introduction: Martin Feldstein and Andrei Shleifer

 

 

9:15-9:30

Introduction to the Health and Safety Project:  Daniel Kessler

 

 

9:30-10:30

Prepared remarks on regulation and litigation in Health and Safety

(roughly):

Mark McClellan, Gary Gottlieb, Richard Posner

 

 

10:30-12:00

General Discussion of Health and Safety

 

 

12:00-13:00

Lunch

 

 

13:00-13:30

Prepared remarks on regulation and litigation in Anti-trust

(roughly):

Dennis Carlton, Martin Hellwig

 

 

13:30-14:00

General Discussion of Anti-trust

 

 

14:00-14:15

Introduction to Financial Regulation Project: Luigi Zingales

 

 

14:15 -14:45:

Prepared remarks on regulation and litigation in finance

(roughly)

Eric Rosengren/Patrick de Fontnouvelle, John Coates

 

 

14:45-16:15

General Discussion of Finance

 

 

16:15-17:00

Final discussion: what have we learned?

 

Memo for October 24th. 

All advanced societies make efforts to prevent bad behavior.   They want to prevent firms from colluding.  They want doctors to make best efforts in treating patients.  They want to keep unsafe drugs and foods from being sold.  They want workplaces and transport to be safe.  They want to stop issuance of worthless securities.  How do societies accomplish this?

In many situations market forces assure safety, competition, and quality.  But, in addition, countries use some combination of regulation (typically, ex ante requirements) and litigation (typically, ex post complaints above damages – although injunctions also exist) to address these problems.  What is so interesting, however, is that, at least in the United States, very different solutions are used in different spheres.  The purpose of our meeting is to discuss this variety of mechanisms of social control, to see which strategy is used in what contexts, and to see if there is room for improvement.

For example, in the US, medical accidents are dealt largely through malpractice litigation: the government does not seek to regulate what procedures doctors use.  In contrast, the introduction of new drugs is regulated, and – unless they are used in a way not approved by the FDA – litigation over ex post outcomes is relatively rare.    In anti-trust, there is a combination of regulation (mergers are pre-approved) and litigation, with the plaintiff usually being the government.  In banking, the emphasis is on regulation, with very little litigation.  In securities markets, the government extensively regulates disclosure, but then leaves much of dispute resolution over accuracy to private litigation.

What explains this variety?  The usual argument for regulation is regulator expertise, combined with some notion of standardization and economies of scale – avoiding the same issue being addressed slowly through multiple trials.  Regulation helps avoid arbitrary judges and ignorant juries, improves predictability, and reduces the costs of social control.   On the other hand, in areas such as anti-trust, medical malpractice, and product safety, the US relies heavily on litigation, despite the significant amounts of expertise the resolution of these disputes requires. 

The usual argument for litigation is the avoidance of capture and politicization of social control of business.   Judges and juries, the argument goes, are less swayed by special interests.  Consistent with this view, some regulatory agencies, such as the FCC, are nearly or perhaps completely obsolete, and exist largely to protect existing market participants from competition.  On the other hand, the FDA and perhaps the SEC have been much more effective in supporting successful markets. 

So here are some questions for discussion:  at the broadest level, can we hypothesize which areas of economic activity should be regulated, and which ones should be left to dispute resolution through litigation?  Within a particular area, such as, say, introduction of new drugs, which potential problems should be litigated, and which regulated?  What parameters of the problem should we look at to answer these questions?  Can existing US institutions be improved, and if so, in what direction?

Regulation versus litigation in health and safety:  possible research topics

 

Workplace injuries

·        Regulation of highly hazardous employers and workplaces

·        Workers' compensation versus tort (Texas employer opt-out)

·        Effects of interest:  injury rates, reemployment rates

 

Products:  medical devices, prescription drugs, auto/aircraft manufacturing

·        Partial/full preemption of state tort liability by federal (e.g., FDA) regulatory compliance

·        Use of court-appointed experts

·        Restrictions on class formation in class actions/regulation of class action compensation

·        Effects of interest:  innovation, product choice

 

Medical care:  health services, health insurance

·        Puzzle of infrequent use of private ADR

·        Statutory no-fault

·        Guidelines-based tort

·        Public program fraud/abuse

·        Effects of interest:  health spending, health outcomes

 

Public health:  handguns, tobacco, lead paint/environmental pollution

·        Political economy of public entities' use of traditionally private causes of action

·        Effects of interest:  prevalence of targeted behavior, cleanup rates, political effects

 

Antitrust:  private causes of action (especially relevant since EU is now considering expansion)

·        Choosing the efficient measure of damages (single, double, triple)

·        Private discoverability of publicly-obtained (sometimes confidential) evidence

·        Effects of interest:  anticompetitive behavior

 

 

Regulation versus litigation in financial markets:  possible research topics

 
  • Security market regulation

 

·        Rethinking regulation 

 

·        The U.S. system of security law was thought 70 years ago, when the equity market was entirely dominated by individuals. Now it is dominated by institutions. Should we rethink regulation?   

 

·        The private equity market is unregulated because there is a barrier to entry for individual investors. Can we think about a multi-tier structure where the level of regulation is a function of the level of sophistication of the players who are let into the market?  

 

·        Trade-off between regulation and private enforcement in countries where both the judiciary and the regulators do not work well.

 
  • Corporate governance regulation

 

·        Do we need any regulation in corporate governance? Why?

    • If so, why self regulation across imposed by the exchanges is sufficient? Is competition driving out any possibility of self-regulation by the exchanges?  

 

·        Opt out regulation and the importance of default options

 

·        Cost and benefit of a “comply or explain” approach. 

 

·        Cost and benefit of Section 404.

 
  • Banking Regulation

 
  • Market based regulation in banking 

  

  • Do we need to rethink the role of lender of last resort?