Chinese Scholars Come to Chicago to Study Law and Economics

by Meredith Heagney

University of Chicago
Law School Office of Communications
July 27, 2012

Six dozen scholars from China, Taiwan, and Hong Kong lined up on the steps behind the Law School, waiting eagerly to have their photograph taken with a man that many consider a personal hero. When Professor Ronald Coase appeared at the door, they erupted into applause.

These scholars are very familiar with the work of the Law School’s Professor Emeritus and Nobel Prize Winner. They have read his writing, assigned his papers to classes they teach, and have worked to apply his insights to the Chinese legal system. Simply put: As the father of law and economics, Coase is a rock star to them. So naturally, they swarmed around him, snapping his picture and thanking him for his many contributions.

Their enthusiasm didn’t end there. The 72 students of the Chicago Summer School in Law and Economics, which focused on Property Rights and Private Law, were intent on learning all they could during the intensive two-week course from July 9 to 20.

In China, where most of the scholars reside, the academic discipline of law and economics is a new one, full of potential insights for the country’s rapidly evolving legal and economic systems. So these scholars chose to travel the 6,500 miles or so to Chicago to study at the birthplace of law and economics, the University of Chicago Law School.

More

See also

Divorcé's Guide to Marriage

by Elizabeth Bernstein

Wall Street Journal
July 24, 2012

Want great marriage advice? Ask a divorced person.

People who lose the most important relationship of their life tend to spend some time thinking about what went wrong. If they are at all self-reflective, this means they will acknowledge their own mistakes, not just their ex's blunders. And if they want to be lucky in love next time, they'll try to learn from these mistakes.

Research shows that most divorced people identify the same top five regrets—behaviors they believe contributed to their marriage's demise and that they resolve to change next time. "Divorced individuals who step back and say, 'This is what I've done wrong and this is what I will change,' have something powerful to teach others," says Terri Orbuch, a psychologist, research professor at the University of Michigan's Institute for Social Research and author of the new book "Finding Love Again: 6 Simple Steps to a New and Happy Relationship." "This is marriage advice learned the hard way," she says.

Dr. Orbuch has been conducting a longitudinal study, funded by the National Institutes of Health, collecting data periodically from 373 same-race couples who were between the ages of 25 and 37 and in their first year of marriage in 1986, the year the study began. Over the continuing study's 25 years so far, 46% of the couples divorced—a rate in line with the Census and other national data. Dr. Orbuch followed many of the divorced individuals into new relationships and asked 210 of them what they had learned from their mistakes. (Of these 210, 71% found new partners, including 44% who remarried.) This is their hard-earned advice.

More

The Feds' New Mortgage Disclosures Are a Bust

by Jonathan Macey

Wall Street Journal
July 17, 2012

The Consumer Financial Protection Bureau's "Mortgage Disclosure Team" just came out with two proposed forms that are supposed to make things easier for borrowers. It took CFPB a year and half of research, drafting and field testing to produce the new documents. The results shine a light on how the Dodd-Frank Wall Street Reform and Consumer Protection Act, which created the CFPB, operates.

Agency head Richard Cordray claimed in the press release accompanying the new disclosure forms that they give "consumers greater power over the exciting and daunting process of buying a home." They won't. The rules that accompany the new forms reduce the power of consumers to choose the product that they want from the widest array of alternatives.

The CFPB is proposing to revise the old forms into a new Loan Estimate Form and Closing Disclosure Form. The old loan form had been five pages; according to the agency website, the new one is three. The closing form remains at five pages. That's a net savings of two pieces of paper. But the agency rules required to implement the new forms weigh in at an astonishing 1,099 pages.

Will they make it easier for consumers to get a loan? The nonprofit Habitat for Humanity is concerned that they will impede its "ability to enable low-income families to become homeowners." Why? Because any lender, including organizations such as Habitat, is at legal risk if they try to help low-income borrowers who lack the ability to repay their loans. (Habitat lends money to people so they can buy the houses they help build. It uses the monthly mortgage payments to help build still more houses.)

More

Human Trafficking and Regulating Prostitution

by Samuel Lee and Petra Persson

NYU Law and Economics Research Paper No. 12-08
July 11, 2012

The effect of prostitution laws on human trafficking and voluntary prostitution is subject to debate. We argue theoretically that neither legalization nor criminalization can simultaneously protect voluntary prostitutes and unambiguously reduce trafficking. We propose a novel, “hybrid” policy that achieves both objectives and restores the free market outcome that arises in the absence of trafficking. If a regulator aims to eradicate all prostitution instead, the optimal policy criminalizes all johns. Criminalizing prostitutes is ineffective and unjust because it fails to eradicate trafficking and penalizes victims. We consider cross-border trafficking, sex tourism, social norms, and political support for prostitution laws. The model predicts that the female-male income ratio is a key determinant of what share of prostitutes is trafficked, the consequences of prostitution laws, and the political will to enact or enforce them.

Read the Paper

Productivity and firm selection: Quantifying the ‘new’ gains from trade

by Gregory Corcos, Massimo Del Gatto, Giordano Mion and Gianmarco I.P. Ottaviano

Vox
July 10, 2012

As protectionist pressures mount worldwide, it is important to continue to shore up the case for open trade policy. This column presents new evidence from Europe on an old gain from trade – the weeding out effect – namely the way increased cross-border competition selects and favours the most productive firms. It argues that this mechanism brings about large gains.

Since the 1988 Cecchini report, there have been many attempts at quantifying gains from trade in the EU. Compared with the state of the art in international trade theory, the main limitation of that literature is its neglect of firm heterogeneity, which implies that only scale economies drive endogenous changes in productivity within sectors. In recent models with heterogeneous firms trade liberalisation has, instead, an additional positive impact on sectoral productivity through the selection of the most efficient firms (Bernard et al. 2003, Melitz 2003).

The reason is a combination of import competition and export market access. On the one hand, as lower trade costs allow foreign producers to target the domestic markets, the operating profits of domestic firms in those markets shrink whatever their productivities. On the other hand, some domestic firms gain access to foreign markets and get additional profits from their foreign ventures. These are the firms that are productive enough to cope with the additional costs of foreign activity (such as those due to transportation and remaining administrative duties or institutional and cultural barriers).

The result is the partition of the initially active domestic firms in three groups. As they start making losses in their home markets without gaining access to foreign markets, the least productive firms are forced to exit. The most productive firms, meanwhile, are able to compensate lost profits on home sales with new profits on foreign sales and so can survive and expand their market shares. Finally, firms with intermediate levels of productivity also survive but, not being productive enough to access foreign markets, are relegated to home sales only and their market shares fall. Since international trade integration eliminates the least productive firms, average productivity grows through the reallocation of productive resources from less to more efficient producers.

More

An Organ 'Donor' Revolution

by Sally Satel

Wall Street Journal
July 9, 2012

With all eyes fixed on the Supreme Court's recent health-care decision, a life-saving development swooped in under the radar: It is now legal to compensate bone-marrow donors. This represents a triumph for the 2,000-3,000 people with cancer and blood diseases who die each year while awaiting a marrow transplant.

Efforts to challenge the federal ban on compensating marrow donors began three years ago, led by the Institute for Justice, a public-interest law firm. The firm's clients were families afraid their ill loved ones would die because they couldn't get a transplant.

Last December, the U.S. Court of Appeals for the Ninth Circuit ruled unanimously in their favor. Pivotal to the judge's decision was that modern bone-marrow donation is accomplished through a process called apheresis, through which doctors filter bone marrow stem cells from blood drawn from a donor's arm. The process takes several hours.

The apheresis technique did not exist in the early 1980s, when the law banning organ sales (the National Organ Transplant Act of 1984) was drafted. At the time, marrow donation was arduous, involving anesthesia and large hollow needles for extracting marrow directly from a donor's hip bone.

Now that apheresis makes donating marrow cells akin to giving plasma, which can already be paid for under the 1984 law, the court saw no logical basis for disallowing payment for it.

More

Watching Behavior Before Writing the Rules

by Richard Thaler

New York Times
July 7, 2012

As a general rule, the United States government is run by lawyers who occasionally take advice from economists. Others interested in helping the lawyers out need not apply.

Of course, there are some exceptions. The government employs scientists of many varieties in technical capacities, from estimating the environmental toxicity of a chemical to the structural soundness of a bridge. But when it comes to forming policies, these scientists and, especially, behavioral scientists are rarely at the table with the lawyers and the economists.

Economists teach us that monopolies are harmful, and this is no exception. Are they really the only social scientists with anything useful to contribute to the efficient running of a government? Imagine that along with the Council of Economic Advisers, a Council of Behavioral Scientist Advisers also provided counsel to the president. What might emerge from such a group?

Thanks to an initiative of the British government, we have some evidence about the benefits that might emerge. Shortly after his center-right coalition took office nearly two years ago, David Cameron, Britain’s Conservative prime minister, established a tiny branch of government called the Behavioral Insights Team. It is led by David Halpern, a social psychologist who has a deep understanding of the workings of government, having previously served in the Labor government of Tony Blair.

Dr. Halpern has a staff of eight civil servants, in addition to a few visiting doctoral students on short-term leave from their universities. The team also has a group of unpaid academic advisers, including me — showing that economists will elbow their way into any activity. As I have been involved with this effort from the beginning, and because I am an economist who also teaches behavioral science — I am not an unbiased source. But having recently returned from a week in London working with the Behavioral Insights Team, I am in a good position to report on some of its progress.

More

Paul Hoppe

Power sharing and institutional stability

by Bernardo Guimaraes and Kevin D. Sheedy

Vox
July 5, 2012

Institutions are a key determinant of economic development and indeed many developing institutions are deeply dysfunctional. This column presents a new model suggesting that those in power may prefer to keep bad institutions despite their anti-development effects since they alllow the elite to grab a bigger slice of a smaller pie.

Economic activity is influenced by institutions that determine the rules prevailing in a society. Examples include how much income is taxed; what firms can and cannot do; whether contracts are enforced and disputes quickly and correctly resolved; and limits on the arbitrary exercise of government power.

Institutions are considered by many researchers as one of the main determinants of economic development, causing large differences in the cross-country distribution of income (see, e.g., North 1990, and Acemoglu et al. 2005). Besides there being a strong correlation in cross-country data (Hall and Jones 1999), institutions appear to be important in explaining some key historical events, including differences in the pattern of development in North and South America (Engerman and Sokoloff 1997) and the economic success of England from the 18th century onwards (North and Weingast 1989).

Rules that give rise to economic inefficiencies are often attributed to institutions serving the interests of an elite rather than the interests of society as a whole. This explanation is not wholly satisfactory however, because why would an elite have incentives to set up institutions that shrink the total pie? Why can the elite not design policies that maximise output which then allow them to extract more in taxes?

Answering this question requires understanding the institutional choices of an elite in power. One important constraint on their choices is what they must do to remain in power: excessively predatory institutions might prompt rebellions. Hence, in order to analyse the economic consequences of control of institutions by an elite, it is necessary to think about how rulers come to power and what they do to remain there.

More