The University of Chicago Law School Faculty Blog

Student Blogger - Summer WIP: Todd Henderson and the "Nanny Corporation"

Professor Todd Henderson kicked off Chicago's Summer Works in Progress events with a presentation of his latest project, "The Nanny Corporation and the Market for Paternalism." Henderson identifies corporate nannyism as the increasing trend amongst businesses to regulate the seemingly private conduct of their employees, on the grounds that it imposes negative externalities on other members of the pool. For example, where employees all pay into company health insurance programs, non-smoking employees cross-subsidize the increased health care costs of their smoking fellows. Non-smokers thus have an incentive to agitate in favor of policies which would reduce these costs, such as differential insurance rates for smokers versus non-smokers, or even an outright prohibition on smoking. The effect of this demand is to create a "market for paternalism", which both corporations and government can seek to meet.

Importantly, Henderson locates the incentive for this sort of "nannying" activity not in any particular moral or social ideal held by the regulator (governmental or corporate), but rather as an extension of self-interest. Nannying reduces overall costs and responds to demands by employees (or citizens) who don't want to bear the costs of cross-subsidization. This contrasts with many accounts of proto-corporate nanny entities (such as "company towns"), which often focused on a sort of moral zealotry as the primary motivation for their existence.

What We Didn't Learn from the Chrysler Bailout (of 1979)

As policymakers consider the terms and conditions of the next bailout of the Big Three under the so-called TARP II plan, it is worth pausing to consider lessons learned from the Chrysler bailout of 1979. For, although it had its detractors, the government's $1.2 billion assistance to Chrysler 30 years ago met some very important criteria for success that the $25 billion bailout Congress has already given the automakers does not.

The best definition of success of any bailout must avoid any biases of hindsight and satisfy broadly held views of limits on government activity. A successful bailout is one (1) where the market cannot act because of a clear market failure and (2) the government acts in ways that mimic the way private parties would have acted. Under this definition, were the auto bailouts then and now a success?

Financial Crisis Double Feature

Like most everyone else, the Law School faculty are talking about the current financial crisis and governments' attempts to resolve it. So we've combined last week's scheduled Faculty Podcast with this week's scheduled Open Minds podcast to bring you two recent faculty panels about the bailout plan. The first, recorded on October 9th and sponsored by the Federalist Society, featured Douglas Baird, Anupam Chander, Rosalind Dixon, and M. Todd Henderson. The second, recorded on October 15th, was sponsored by the Law School Democrats and Law School Republicans and included  Randy Picker, Douglas Baird, M. Todd Henderson, and the GSB's John Cochrane (you can also read a summary of the panel here).

Student Blogger - Bailout Panel: Picker, Cochrane, Baird, and Henderson

Update: You can now listen to a podcast of this panel.

The current financial period is--according to Professor Randy Picker--an "interesting time." On Wednesday, October 15, the Law School Republicans and Democrats co-hosted a panel on the bailout featuring Professors Doug Baird, Todd Henderson, and Picker from the Law School and Professor John Cochrane from the Graduate School of Business across the Midway. The panel demonstrated just how interesting these times are with a lively discussion.

What academics try to do is understand, and Picker laid out a plan for doing so with respect to the bailout. He will teach a seminar winter quarter on bailouts with the help of Baird and Henderson, and the Law School will host a conference in the spring on the current crisis and response. The desire for an immediate response prompted this panel. If the seminar and conference are the final 451-page bailout package, this panel is like Paulson's 3-page proposal--only more successful.

Audio/Video: M. Todd Henderson: "Predicting Crime (without the Pre-Cogs)"

In the absence of pre-cognitive superbeings and Tom Cruise, how are police and policy makers supposed to allocate scarce crime-fighting resources? There is a vibrant academic literature on predicting crime, with models of various types offered as the best way of estimating future crime rates. Many of these involve mapping software, which plots the past in the hopes of extrapolating to the future. Police use some of these techniques, but most are very crude, using things like weather or the location of liquor stores as "hot spots" to estimate crime rates. Police also use experience and gut instinct. All of the various methods, whether formal models or inside the head of the commissioner of police, are deployed in haphazard and isolated ways. In this lecture, recorded May 13, 2008 as part of the Chicago's Best Ideas lecture Assistant Professor of Law M. Todd Henderson presents an alternative.

Video of the talk is embedded below, and a .mov file and .mp3 file are also available. Prof. Henderson's paper on this topic (written with Justin Wolfers and Eric Zitzewitz) is available from SSRN.

Scienter disclosure

Ever since Louis Brandeis wrote that "sunlight is the best disinfectant," disclosure has been the fetish of American law. Our securities laws and much of corporate law are premised on the assumption that disclosure is a virtual legal panacea -- if individuals are aware of the relevant information, then the opportunities for strategic opportunism will be reduced or eliminated. For this reason, the knee-jerk response to perceived problems in nearly every area of law is increased disclosure.

But there may be a dark side to disclosure. In a paper posted to SSRN today (and discussed here), this issue is explored in the context of Rule 10b5-1 insider trading plans, which provide a litigation prophylactic for insiders who pre-commit to trades. Because disclosure of these plans is not mandatory, firms' voluntary disclosure offers a nice test of the social benefits and costs of disclosure.

My co-authors (Alan Jagolinzer and Karl Muller) and I find, among other things, that insiders who disclose the existence of plans earn significant abnormal returns (about 12% in 6 months) compared with insiders who do not disclose. The intuition here is that disclosure increases the opportunities for strategic trading due to the litigation risk reduction benefits. Our data also show that any attempt to "solve" this problem by requiring disclosure of plan participation is unlikely to succeed because the firms currently not disclosing are the ones least likely to be acting strategically. The full abstract is posted after the jump.

Has Law & Literature Worked?

When I was a student here at Chicago, I took a fabulous class called "Law & Literature" from Professor Nussbaum. We read books like "Native Son" and "Borrowed Time: An AIDS Memoir" with the goal of increasing our empathy. The conceit of the Law & Literature movement, if we can call it that, is that if judges (some of us would eventually be one or otherwise be in policy setting positions) read fiction, they will reach better results because they will more fully understand the human condition. Relying heavily on Aristotle, Professor Nussbaum offered literature (what might happen) as a strong rival to history (what has happened) and economics.

So has Law & Literature had an impact on judges? We can't know for sure, but if it has we might expect citations to literature to show up in judicial opinions, especially in the empathy-evoking form favored by its proponents. In a piece in the current issue of the Green Bag, I survey federal appellate opinions for evidence of impact. (Preview: there is virtually none.) I also identify the most commonly cited authors, the judges most likely to cite to fiction, and the places in which literary citations are most likely to occur, as well as explore what this tells us about judicial opinions and the act of judging.

You can find the paper here:

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1113511

"Corporate Philanthropy and the Market for Altruism"

Todd Henderson and Anup Malani recently posted their paper "Corporate Philanthropy and the Market for Altruism" to SSRN. The abstract is below, and the paper can be downloaded here. You can also listen to Prof. Malani's discuss corporate philanthropy at a CBI earlier this year.

The existing literature on corporate philanthropy asks why corporations engage in philanthropy. But corporations are not alone in doing good works. Non-profit charities and the government also lend a hand. Together the three sectors compete in a larger market for good deeds where individuals seek to satisfy their desire to help others.

The existing literature on public goods ignores the role for-profit firms play in this market, which we call the market for altruism. Once the demand and supply for altruism is understood, asking why firms are philanthropic becomes about as meaningful as asking why Ford produces the Explorer or Apple produces the iPod Nano. Instead the question becomes how is this market different from other markets, and when are for-profit corporations best suited to supplying it. The market for altruism is special because one of the competitors - the government - also regulates competition in the remainder of the market. After analyzing the market for altruism, and explaining the comparative advantages of corporations, this paper highlights one area - tax policy - in which the government discriminates among competitors. We argue that this discrimination is not justified and propose a number of tax reforms to level the playing field and improve the efficiency of the market for altruism.

 

Conditional Prediction Markets, Presidential and Otherwise

The heat of the presidential primary races brings us a new application for prediction markets. Long-used to predict the outcome of presidential elections, these markets are now being deployed to measure economic and strategic variables conditional on who is elected president. The for-profit firm Intrade is offering (for no transaction fee) a variety of conditional markets designed to predict oil prices, long-term interest rates, government debt loads, and the number of troops in Iraq depending on who wins the 2008 election. This forecasting tool has the virtue of capturing the market's best guess about the state of the world after the election, which thereby informs our views of the election. For example, if the market thinks that the number of troops in Iraq will be the same whether Obama or McCain wins in November, this tells us that perhaps we shouldn’t vote based on this issue since the wisdom of the crowd says it isn’t one. Or, if we are a firm interested in oil prices or interest rates (which one isn’t?), these markets may provide very useful information about future uncertainties.

Of course, these conditional markets have great appeal and wide possible application in the corporate law world too.

The Nanny Corporation

The “Nanny State” seems to be thriving as never before. To see this, I need only peer out from my 6th Floor window at the City of Chicago, which has recently banned foie gras (it is bad for the geese) and smoking in bars (it is bad for the smokers, non-smoking patrons, and bar employees). Similar moves are happening all over the country. This well-known phenomenon is getting traction among Republican presidential candidates, and was the subject of a recent book by journalist David Harsanyi.

We are also seeing the rise of the “Nanny Corporation”.