CONTENTSOFTHEHANDBOOK VOLUME1 PARTI:PRIMARYELEMENTSOFTHELEGALSYSTEM Chapter1 ContractLaw BENJAMINE.HERMALIN AVERYW.KATZ RICHARDCRASWELL Chapter2 LiabilityforAccidents STEVENSHAVELL Chapter3 PropertyLaw DEANLUECK THOMASMICELI Chapter4 Litigation KATHRYNE.SPIER Chapter5 EmpiricalStudyoftheCivilJusticeSystem DANIELP.KESSLER DANIELL.RUBINFELD Chapter6 TheTheoryofPublicEnforcementofLaw A.MITCHELLPOLINSKY STEVENSHAVELL Chapter7 EmpiricalStudyofCriminalPunishment STEVEND.LEVITT THOMASJ.MILES vii viii ContentsoftheHandbook PARTII:ADDITIONALAREASOFTHELEGALSYSTEM Chapter8 EnvironmentalLaw RICHARDL.REVESZ ROBERTN.STAVINS Chapter9 RegulationofHealth,Safety,andEnvironmentalRisks W.KIPVISCUSI Chapter10 Taxation LOUISKAPLOW Chapter11 InternationalLaw ALANO.SYKES VOLUME2 PARTII:ADDITIONALAREASOFTHELEGALSYSTEM—continued Chapter12 CorporateLawandGovernance MARCOBECHT PATRICKBOLTON AILSARÖELL Chapter13 EmpiricalStudyofCorporateLaw SANJAIBHAGAT ROBERTAROMANO Chapter14 BankruptcyLaw MICHELLEJ.WHITE Chapter15 Antitrust LOUISKAPLOW CARLSHAPIRO ContentsoftheHandbook ix Chapter16 RegulationofNaturalMonopoly PAULL.JOSKOW Chapter17 EmploymentLaw CHRISTINEJOLLS Chapter18 AntidiscriminationLaw JOHNJ.DONOHUE Chapter19 IntellectualPropertyLaw PETERS.MENELL SUZANNESCOTCHMER PARTIII:OTHERTOPICS Chapter20 NormsandtheLaw RICHARDH.MCADAMS ERICB.RASMUSEN Chapter21 ExperimentalStudyofLaw COLINCAMERER ERICTALLEY Chapter22 ThePoliticalEconomyofLaw MCNOLLGAST PREFACE Law can be viewed as a body of rules and legal sanctions that channel behavior in socially desirable directions—for example, by encouraging individuals to take proper precautionstopreventaccidentsorbydiscouragingcompetitorsfromcolludingtoraise prices. The incentives created by the legal system are thus a natural subject of study by economists. Moreover, given the importance of law to the welfare of societies, the economicanalysisoflawmeritsprominenttreatmentasasubdisciplineofeconomics. OurhopeisthatthistwovolumeHandbookwillfosterthestudyofthelegalsystemby economists. The origins of law and economics may be traced to eighteenth century writings on crime by Beccaria (1767) and Bentham (1789). The modern incarnation of the field dates from the 1960s: Coase (1960) on property rights, externalities, and bargaining; Calabresi(1961,1970)onliabilityrulesandaccidentlaw;Demsetz(1967)ontheemer- genceofpropertyrights;andBecker(1968)oncrime.OfgreatsignificancewasPosner (1972),thefirstapplicationofeconomicanalysistothebodyoflawasawhole(Posner alsoauthorednumerousinfluentialarticlesonspecificlegaltopics). This early writing in law and economics was mainly informal and emphasized ba- sic subject areas of law. Later scholarship began to include formal work, notably by Brown(1973),Diamond(1974),Spence(1977),andShavell(1980a)onliabilityrules and accidents, Polinsky (1979) on property rights and liability rules, Barton (1972) and Shavell (1980b) on contract law, Landes (1971) and Gould (1973) on litigation behavior, and, following Becker (1968), Polinsky and Shavell (1979) on law enforce- ment. Law and economics scholarship also expanded into other subject areas, with corporate law receiving the most attention—see, for example, early contributions by Bebchuk (1985), Easterbrook and Fischel (1991) (synthesizing previously written ar- ticles),Gilson(1981),andManne(1965).Additionally,empiricalresearchwasunder- taken, initially mostly in the area of crime, and subsequently in many other fields as well,especiallycorporatelaw. ThepurposeofthisHandbookistoprovideeconomistswithasystematicintroduc- tiontoandsurveyofresearchinthefieldoflawandeconomics.TheHandbookcontains 22chaptersandisorganizedintothreemainparts.PartIdealswiththebuildingblocks ofthelegalsystem:propertylaw;contractlaw;accidentlaw(torts);litigation(includ- ingaspectsofcivilprocedure);andpublicenforcementoflaw(includingcriminallaw). PartIItreatsotherprominentareasoflaw:corporatelaw;bankruptcylaw;antitrustlaw; regulation (of externalities, natural monopolies, and network industries); employment andlaborlaw;antidiscriminationlaw;intellectualpropertylaw;environmentallaw;and internationallaw.PartIIIaddressesthreeadditionaltopics:normsandthelaw;theex- perimental study of law; and political economy and the law. Most of the chapters are xi xii Preface theoretically-oriented, but many mention relevant empirical work and three focus on empiricalresearch(oncivillaw,publiclawenforcement,andcorporatelaw). The first volume of the Handbook includes all of Part I and several chapters from PartII.ThesecondvolumecontainstheremainingchaptersofPartIIandallofPartIII. WearegratefultoKennethArrowandMichaelIntriligatorforencouragingthedevel- opmentoftheHandbookandfortheirsubstantivesuggestionsaboutit;toValerieTeng andMarkNewsonofElsevierfortheirableassistancewiththeadministrativetasksas- sociatedwithitsproduction;andtotheJohnM.OlinFoundation,throughourrespective institutions’lawandeconomicsprograms,forsupportingourpreparationofit. A.MitchellPolinsky&StevenShavell References Barton,J.H.(1972).“Theeconomicbasisofdamagesforbreachofcontract”.JournalofLegalStudies1, 277–304. Bebchuk,L.A.(1985).“Towardundistortedchoiceandequaltreatmentincorporatetakeovers”.HarvardLaw Review98,1695–1808. Beccaria,C.(1767).OnCrimesandPunishments,andOtherWritings.Bellamy,R.(Ed.),TranslatorDavies, R.etal.CambridgeUniversityPress,NewYork(1995). Becker, G.S. (1968). “Crime and punishment: an economic approach”. Journal of Political Economy 76, 169–217. Bentham,J.(1789).“AnIntroductiontothePrinciplesofMoralsandLegislation”.In:TheUtilitarians.An- chorBooks,GardenCity,N.Y.(1973). Brown,J.P.(1973).“Towardaneconomictheoryofliability”.JournalofLegalStudies2,323–349. Coase,R.H.(1960).“Theproblemofsocialcost”.JournalofLawandEconomics3,1–44. Calabresi,G.(1961).“Somethoughtsonriskdistributionandthelawoftorts”.YaleLawJournal70,499–553. Calabresi,G.(1970).TheCostsofAccidents:ALegalandEconomicAnalysis.YaleUniversityPress,New Haven. Demsetz,H.(1967).“Towardatheoryofpropertyrights”.AmericanEconomicReview:PapersandProceed- ings57,347–359. Diamond,P.A.(1974).“Singleactivityaccidents”.JournalofLegalStudies3,107–164. Easterbrook,F.H.,Fischel,D.R.(1991).TheEconomicStructureofCorporateLaw.HarvardUniversityPress, Cambridge. Gilson,R.(1981).“Astructuralapproachtocorporations:thecaseagainstdefensivetacticsintenderoffers”. StanfordLawReview33,819–891. Gould,J.P.(1973).“Theeconomicsoflegalconflicts”.JournalofLegalStudies2,279–300. Landes,W.M.(1971).“Aneconomicanalysisofthecourts”.JournalofLawandEconomics14,61–107. Manne,H.G.(1965).“Mergersandthemarketforcorporatecontrol”.JournalofPoliticalEconomy73,110– 120. Polinsky,A.M.(1979).“Controllingexternalitiesandprotectingentitlements:propertyright,liabilityrule, andtaxsubsidyapproaches”.JournalofLegalStudies8,1–48. Polinsky,A.M.,Shavell,S.(1979).“Theoptimaltradeoffbetweentheprobabilityandmagnitudeoffines”. AmericanEconomicReview69,880–891. Posner,R.A.(1972).EconomicAnalysisofLaw,1stedn.Little,BrownandCompany,Boston. Shavell,S.(1980a).“Strictliabilityversusnegligence”.JournalofLegalStudies9,1–25. Shavell,S.(1980b).“Damagemeasuresforbreachofcontract”.BellJournalofEconomics11,466–490. Spence,A.M.(1977).“Consumermisperceptions,productfailureandproducerliability”.ReviewofEco- nomicStudies44,561–572. CONTENTSOFVOLUME2 IntroductiontotheSeries v ContentsoftheHandbook vii Preface xv PARTII: AdditionalAreasoftheLegalSystem—continued 827 Chapter12 CorporateLawandGovernance MARCOBECHT,PATRICKBOLTON,ANDAILSARÖELL 829 1. Introduction 833 2. Historicalorigins:Abriefsketch 834 2.1. Howrepresentativeiscorporategovernment? 834 2.2. Whomshouldcorporategovernmentrepresent? 836 3. Whycorporategovernanceiscurrentlysuchaprominentissue 836 3.1. Theworld-wideprivatisationwave 837 3.2. Pensionfundsandactiveinvestors 837 3.3. Mergersandtakeovers 840 3.4. Deregulationandcapitalmarketintegration 840 3.5. The1998EastAsia/Russia/Brazilcrisis 841 3.6. ScandalsandfailuresatmajorU.S.corporations 841 4. Conceptualframework 842 4.1. Agencyandcontracting 842 4.2. Ex-anteandex-postefficiency 842 4.3. Shareholdervalue 843 4.4. Incompletecontractsandmultipleconstituencies 843 4.5. Whydoweneedregulation? 845 4.6. Dispersedownership 846 4.7. Summaryandconclusion 846 5. Models 848 5.1. Takeovermodels 848 5.2. Blockholdermodels 853 5.3. Delegatedmonitoringandlargecreditors 857 5.4. Boardmodels 859 5.5. Executivecompensationmodels 862 5.6. Multi-constituencymodels 863 6. Comparativeperspectivesanddebates 869 xiii xiv ContentsofVolume2 6.1. Comparativesystems 870 6.2. Viewsexpressedincorporategovernanceprinciplesandcodes 875 6.3. Otherviews 877 7. Empiricalevidenceandpractice 877 7.1. Takeovers 878 7.2. Largeinvestors 886 7.3. Minorityshareholderaction 895 7.4. Boards 898 7.5. Executivecompensationandcareers 900 7.6. Multipleconstituencies 906 8. Recentdevelopments 909 8.1. Regulatoryresponsestocorporatescandals 910 8.2. Executivecompensationandearningsmanipulation 913 8.3. Reformingtheboardofdirectors 915 8.4. Othermajorresearchthemes 916 9. Conclusion 919 References 920 Chapter13 EmpiricalStudiesofCorporateLaw SANJAIBHAGATANDROBERTAROMANO 945 1. Introduction 947 2. Aguidetoeventstudies 947 2.1. Mechanicsofeventstudies 948 2.2. Statisticalpowerofeventstudies 952 2.3. Cross-sectionaldeterminantsofthestockmarket’sreaction 954 2.4. Assessingtheusefulnessoftheeventstudymethodologyforcorporatelawresearch 955 3. Econometric issues: endogeneity in corporate governance and performance studies 956 3.1. Corporatecontrol,performance,andgovernance 956 3.2. Corporategovernanceandperformance 957 3.3. Corporateownershipandperformance 957 3.4. Corporategovernanceandownershipstructure 959 3.5. Simultaneousequationsestimation 959 4. Empiricalresearchincorporatelaw 960 4.1. Shareholderwealthimplicationsofcorporatelawsuits 960 4.2. Empiricalresearchandthedebateoverstatecompetitionforcorporatecharters 970 4.3. Empiricalresearchontakeovers 987 4.4. Researchoncorporategovernance 992 4.5. Eventstudiesandsecuritiesregulation 999 4.6. Comparativecorporategovernance 1000 5. Conclusion 1003 References 1003 ContentsofVolume2 xv Chapter14 BankruptcyLaw MICHELLEJ.WHITE 1013 1. Introduction 1016 PartA:Corporatebankruptcy 1019 2. Legalbackground—corporatebankruptcylaw 1019 2.1. Chapter7liquidation 1019 2.2. Chapter11reorganization 1021 2.3. Non-bankruptcyworkouts 1023 3. Researchoncorporatebankruptcy—theory 1024 3.1. Effects of priority rules on the bankruptcy decision, managerial effort, and the choice betweensafeversusriskyinvestments 1024 3.2. ProposedreformsofChapter11—auctions,options,andbankruptcybycontract 1034 4. Researchoncorporatebankruptcy—empiricalwork 1040 4.1. Bankruptcycosts 1040 4.2. Deviationsfromtheabsolutepriorityrule 1041 PartB:Personalbankruptcy 1043 5. Legalbackground—personalbankruptcylaw 1045 5.1. Creditors’legalremediesoutsideofbankruptcy 1045 5.2. Chapter7“liquidation” 1045 5.3. Chapter13“adjustmentofdebtsofconsumerswithregularincome” 1047 5.4. Thenewbankruptcylaw 1048 6. Trendsinpersonalbankruptcyfilings 1049 7. Researchonpersonalbankruptcy—theory 1049 7.1. Optimalpersonalbankruptcypolicy—consumptioninsuranceandworkeffort 1049 7.2. Additionaltheoreticalissues 1054 8. Researchonpersonalandsmallbusinessbankruptcy—empiricalwork 1058 8.1. Politicaleconomyofbankruptcy 1059 8.2. Studiesofthebankruptcyfilingdecisionusingaggregatedata 1060 8.3. Studiesofthebankruptcyfilingdecisionusinghousehold-leveldata 1060 8.4. Empiricalresearchonworkeffortandthe“freshstart” 1063 8.5. Bankruptcyandthedecisiontobecomeanentrepreneur 1063 8.6. Bankruptcyandcreditmarkets 1064 8.7. Macroeconomiceffectsofbankruptcy 1067 References 1068 Chapter15 Antitrust LOUISKAPLOWANDCARLSHAPIRO 1073 1. Introduction 1077 2. Marketpower 1078 2.1. Definitionofmarketpower 1079 2.2. Single-firmpricingmodelaccountingforrivals 1080 xvi ContentsofVolume2 2.3. Multiple-firmmodels 1083 2.4. Meansofinferringmarketpower 1087 2.5. Marketpowerinantitrustlaw 1095 3. Collusion 1098 3.1. Economicandlegalapproaches:anintroduction 1099 3.2. Oligopolytheory 1103 3.3. Industryconditionsbearingonthelikelihoodofcollusiveoutcomes 1108 3.4. Agreementsunderantitrustlaw 1121 3.5. Otherhorizontalarrangements 1129 3.6. Antitrustenforcement 1136 4. Horizontalmergers 1138 4.1. Oligopolytheoryandunilateralcompetitiveeffects 1139 4.2. Oligopolytheoryandcoordinatedeffects 1149 4.3. Empiricalevidenceontheeffectsofhorizontalmergers 1152 4.4. Antitrustlawonhorizontalmergers 1157 4.5. MarketanalysisundertheHorizontalMergerGuidelines 1169 4.6. Predictingtheeffectsofmergers 1178 5. Monopolization 1180 5.1. Monopolypower:economicapproach 1181 5.2. Legalapproachtomonopolization 1186 5.3. Predatorypricing 1194 5.4. Exclusivedealing 1203 6. Conclusion 1213 Acknowledgements 1214 References 1214 Cases 1224 Chapter16 RegulationofNaturalMonopoly PAULL.JOSKOW 1227 1. Introduction 1229 2. Definitionsofnaturalmonopoly 1232 2.1. Technologicaldefinitionsofnaturalmonopoly 1232 2.2. Behavioralandmarketequilibriumconsiderations 1238 2.3. Sunkcosts 1240 2.4. Contestiblemarkets:subadditivitywithoutsunkcosts 1241 2.5. Sunkcostsandbarrierstoentry 1244 2.6. Empiricalevidenceoncostsubadditivity 1248 3. Whyregulatenaturalmonopolies? 1248 3.1. Economicefficiencyconsiderations 1249 3.2. Otherconsiderations 1255 3.3. Regulatorygoals 1260 4. Historicalandlegalfoundationsforpriceregulation 1262 ContentsofVolume2 xvii 5. Alternativeregulatoryinstitutions 1265 5.1. Overview 1265 5.2. Franchisecontractsandcompetitionforthemarket 1267 5.3. Franchisecontractsinpractice 1269 5.4. Independent“expert”regulatorycommission 1270 6. Priceregulationbyafullyinformedregulator 1273 6.1. Optimallinearprices:Ramsey-Boiteuxpricing 1274 6.2. Non-linearprices:simpletwo-parttariffs 1276 6.3. Optimalnon-linearprices 1277 6.4. Peak-loadpricing 1281 7. Costofserviceregulation:responsetolimitedinformation 1285 7.1. Cost-of-serviceorrate-of-returnregulationinpractice 1286 7.2. TheAverch-Johnsonmodel 1298 8. Incentiveregulation:theory 1301 8.1. Introduction 1301 8.2. PerformanceBasedRegulationtypology 1306 8.3. Someexamplesofincentiveregulationmechanismdesign 1310 8.4. Priceregulationwhencostisnotobservable 1318 8.5. Pricingmechanismsbasedonhistoricalcostobservations 1320 9. Measuringtheeffectsofpriceandentryregulation 1321 9.1. Incentiveregulationinpractice 1322 10. Competitiveentryandaccesspricing 1329 10.1. One-waynetworkaccess 1331 10.2. Introducinglocalnetworkcompetition 1335 10.3. Two-wayaccessissues 1337 11. Conclusions 1339 References 1340 Chapter17 EmploymentLaw CHRISTINEJOLLS 1349 1. Framework 1352 1.1. Employmentlawintheabsenceofmarketfailure 1352 1.2. Marketfailuresintheemployer-employeerelationship 1354 2. Workplacesafetymandates 1357 2.1. Theoreticalanalysisofworkplacesafetymandates 1358 2.2. Empiricalanalysisofworkplacesafetymandates 1359 3. Compensationsystemsforworkplaceinjuries 1361 4. Workplaceprivacymandates 1362 4.1. Theoreticalanalysisofworkplaceprivacymandates 1362 4.2. Empiricalanalysisofworkplaceprivacymandates 1363 5. Fringebenefitsmandates 1363 5.1. Theoreticalanalysisoffringebenefitsmandates 1365