Law and Economics

Members of the NBER's Law and Economics Program met in Cambridge on February 16. Program Director Christine Jolls of Yale University organized the meeting. These researchers' papers were presented and discussed:

Michael D. Frakes, Duke University and NBER, and Jonathan Gruber, MIT and NBER

Defensive Medicine: Evidence from Military Immunity

A major source of controversy in U.S. health care is the practice of "defensive medicine," an unintended effect of the liability system in which physicians order extraneous tests and procedures as a result of fears over medical liability. Existing evidence on the importance of this issue is quite mixed, however, partly because of the difficulty of finding a clean comparison between groups who are and are not subject to malpractice pressure. The structure of malpractice protections under the Military Health System (MHS), the $50 billion/year program that provides health care for active duty military and their dependents, provides such a comparison. Active-duty patients seeking medical treatment from military facilities cannot sue should they suffer harm as a result of negligent medical care, while protections are provided to dependents treated at military facilities and to all patients—active-duty or not—that receive care from civilian facilities. Drawing on this variation and exploiting exogenous shocks to care location choices stemming from military hospital closures pursuant to the Base Realignment and Closure process, Frakes and Gruber estimate that liability immunity meaningfully reduces inpatient treatment intensity with no measurable negative effect on patient outcomes.

John Matsusaka, Oguzhan Ozbas, and Irene Yi, University of Southern California

Can Shareholder Proposals Hurt Shareholders? Evidence from SEC No-Action Letter Decisions

This paper studies the market reaction to SEC no-action letter decisions in order to produce well-identified estimates of the value consequences of shareholder proposals. Whereas previous research is limited by an inability to identify the date when investors become aware of a proposal, Matsusaka, Ozbas, and Yi's approach employs a well-defined event date at which the SEC makes an uncertain and expressly value-neutral decision to block a proposal or allow it to proceed to a vote. The researchers find that over the period 2007-2016, the market reacted positively when the SEC permitted a proposal to be excluded from the proxy statement, suggesting that the market viewed these proposals as harmful to shareholders. Investors appear to have been most skeptical about proposals relating to corporate governance and the elements of the E-Index, and proposals targeted at high-profit firms. The evidence casts doubt on the assumption that proposal rights can only help and never hurt shareholders.

Lauren Cohen, Harvard University and NBER, and Umit Gurun, University of Texas at Dallas

Buying the Verdict

Cohen and Gurun document evidence that firms systematically increase specialized, locally targeted advertising following the firm being taken to trial in that given location precisely following initiation of the suit. In particular, the researchers use legal actions brought against publicly traded firms over the 20 year sample period that progress to trial from 1995-2014. In terms of magnitude, the increase is sizable: targeted local advertising increases by 23% (t=4.39) following the suit. Moreover, firms concentrate these strategic increases in locations where the return on their advertising dollars are largest: in smaller, more concentrated advertising markets where fewer competitor firms are advertising. They focus their advertisement spikes specifically toward jury trials, and in fact specifically toward the most likely jury pool. Lastly, the researchers document that these advertising spikes are associated with verdicts, increasing the probability of a favorable outcome.

Roberta Romano, Yale University and NBER

Does Agency Structure Affect Agency Decisionmaking? Implications of the CFPB's Design for Administrative Governance

An extensive literature has analyzed the accountability of administrative agencies, and in particular, their relationship to Congress. A well-established strand in the literature emphasizes that Congress retains control over agencies by their design, with a focus on the structure and process by which agency decisionmaking is undertaken. Romano examines the relationship between agency structure and decision making across four agencies with similar statutory missions but different organizational structures: the Consumer Financial Protection Bureau ("CFPB"), with a uniquely independent and controversial structure, and the Commodity Futures Trading Commission, Consumer Product Safety Commission, and Securities and Exchange Commission with more conventional independent commission structures. Romano presents data indicating that agency structure influences agency decisionmaking. More specifically, her statistical analysis is robustly consistent with an agency's insulation from Congress being related to its choice of regulatory instrument, as the most independent agency in this study, the CFPB, uses significantly less frequently the most publicly accountable regulatory instrument of notice and- comment rulemaking.

Steven Shavell, Harvard University and NBER

The Rationale for Motions in the Design of Adjudication

The conduct of adjudication is often influenced by motions — requests made by litigants to modify the course of adjudication. Shavell studies why adjudication should be designed so as to permit the use of motions. The answer developed is that litigants will naturally know a great deal about their specific matter, whereas a court will ordinarily know little except to the degree that the court has already invested effort to appreciate it. By giving litigants the right to bring motions, the judicial system leads litigants to efficiently provide information to courts that is relevant to the adjudicative process.

Edward H. Stiglitz, Cornell Law School

Folk Theories and Constitutional Values

Abstract constitutional values often motivate separation of powers doctrine and doctrines in other areas of law. A jurist favors one doctrinal position over another because, under some implicit positive theory, it promotes a consequential value: for example, abstract liberty, rule of law, or democratic values. Yet this jurisprudential posture falters if theory is incomplete or inapt. As an object lesson into the perils of incomplete functionalism, Stiglitz considers the relationship between the so-called unitary executive and democratic values. He acknowledges a theoretical account of the unitary executive along the lines of the one that animates judicial decisions. He then argue that, viewed in a more complete setting, judicial decisions seemingly promoting a unitary executive may engender pluralism and undermine the value of accountability. Stiglitz empirically examines the relationship between electoral accountability and innovations relating to one such offensive institution -- the legislative veto -- in the context of the American states between 1970-2010. Stiglitz finds that the offending institution of the legislative veto is, if anything, associated with stronger, not weaker, executive accountability for administrative actions, questioning the soundness of democratic values as a motivation for pursuing a unitary executive. He concludes with thoughts on the role of courts in managing functionalist constitutional values.

Cäzilia Loibl, The Ohio State University; Lucia Reisch, Copenhagen Business School; Julius Rauber, Zeppelin University; and Cass R. Sunstein, Harvard University

Which Europeans Like Nudges? Approval and Controversy in Four European Countries

Nudges are choice-preserving interventions that steer people's behavior in specific directions while allowing people to go their own way. Some nudges have been controversial, because they are seen as objectionably paternalistic. Loibl, Reisch, Rauber, and Sunstein report on nationally representative surveys in eight diverse countries, investigating how people actually think about nudges and nudging. They cover Australia, Brazil, Canada, China, Japan, Russia, South Africa, and South Korea. Generally, the researchers find strong majority support for nudges in all countries, with the important exception of Japan, and with spectacularly high approval rates in China and South Korea. The researchers connect the findings here to earlier studies involving the United States, the United Kingdom, Italy, Denmark, France, Germany, and Hungary. The largest conclusion is that while citizens generally approve of health and safety nudges, the nations of the world appear to fall into three distinct categories: (1) A group of nations, mostly liberal democracies, where strong majorities approve of nudges whenever they (a) are seen to fit with the interests and values of most citizens and (b) do not have illicit purposes. (2) A group of nations where overwhelming majorities approve of nearly all nudges. (3) A group of nations with markedly lower approval ratings for nudges. The researchers offer some speculations about the relationship between approval rates and trust.

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