Ian Ayres

Solomonic Bargaining: Dividing a Legal Entitlement to Facilitate Coasean Trade

t William K. Townsend Professor of Law. Yale Law School; J.D.. Yale Law School: Ph D. (Economics), Massachusetts Institute of Technology. It J.D., Stanford University Law School; Ph.D. Candidate (Economics). Stanford University WVe are grateful to Jennifer Brown, Peter Cramton, Dick Craswell. Bob Ellickson. Lewis Komhauscr. Dean Leuck. Sandy Meiklejohn, Paul Milgrom, Barry Nalebuff. Mitch Polinsky. Jeffrey Rachlhnski. Eric Rasmusen. Roberta Romano, Carol Rose, Alan Schwartz, Matthew Spitzer. and Scott Stem for helpful comments The fundamental insights of Jason Scott Johnston---especially as contained in his excellent manuscript. Bargaining Under Rules Versus Standards (June 28. 1994)-have inspired much of the analysis in this Article. Support from the John M. Olin Program in Law and Economics is gratefully acknowledged. WVe also benefited from comments at a Harvard conference on property and liability rules

Deficit Reduction Through Diversity: How Affirmative Action at the FCC Increased Auction Competition

In recent auctions for paging licenses, the Federal Communications Commission has granted businesses owned by minorities and women substantial bidding credits. In this article, Professors Ayres and Cramton analyze a particular auction and argue that the affirmative action bidding preferences, by increasing competition among auction participants, increased the governments revenue by

Outcome Tests of Racial Disparities in Police Practices

45 million. Subsidizing the participation of new bidders can induce established bidders to bid more aggressively. The authors conclude that this revenue- enhancing effect does not provide a sufficient constitutional justification for affirmative action-but when such justification is independently present, affirmative actions can cost the government much less than is currently thought.

Further Evidence of Discrimination in New Car Negotiations and Estimates of Its Cause

This article assesses the strengths and weaknesses of using “outcome tests” to assess racial disparities in police practices. An outcome test, for example, might assess whether the probability of finding contraband was higher for whites who are searched than for minorities who are searched.

How Cartels Punish: A Structural Theory of Self-Enforcing Collusion

A 1991 test of new car dealerships in Chicago indicated that dealerships offered significantly lower prices to white male testers than to similarly situated black and-or female testers: white female testers were asked to pay 40% higher markups than white male testers; black male testers were asked to pay more than twice the markup of white male testers; and black female testers were asked to pay more than three times the markup of white male testers.1 This article extends the results of this initial test by presenting not only more authoritative evidence of discrimination but also a new quantitative method of identifying the causes of discrimination. Although the results of the original study were based on 165 negotiations, the original article emphasized that: [t]he most significant methodological weakness concerns the number of testers per tester type .... Only six testers were hired: one white female, one black female, one black male, and three white males. Thus, for example, the results demonstrating discrimination against black females are based on tests conducted by an individual black female (paired with one of three white males).2 This article presents the results of an expanded audit study that corrects for this weakness. In the expanded audits, 38 testers, including 5 black males, 7 black females, and 8 white females, negotiated for over 400 automobiles. The results are more authoritative than

Correlated Values in the Theory of Property and Liability Rules

* Law Clerk to the Hon. James K. Logan, United States Court of Appeals for the 10th Judicial Circuit; Assistant Professor, Northwestern University School of Law (beginning August 1987); Research Fellow, American Bar Foundation (beginning August 1987). B.A. Yale University, 1981;J.D. Yale University, 1986; Ph.D Candidate (Economics), Massachusetts Institute of Technology. I thank John Donohue, Henry Hansmann, Al Klevorick, George Priest, Garth Saloner, Steven Salop, Richard Schmalensee, Louis Schwartz, Oliver Williamson, and participants of seminars at Cardozo, Duke, Emory, Iowa, Northwestern, and Yale for valuable comments. Financial support from the Yale Center for Studies in Law, Economics and Public Policy is gratefully acknowledged. 1. Structural theories have many antecedents. See, e.g., G. Stigler, A Theory of Oligopoly, in The Organization of Industry 39-63 (1968); Hay & Kelley, An Empirical Survey of Price Fixing Conspiracies, 17 J.L. & Econ. 13 (1974). More generally, these theories follow the Structure-Conduct-Performance (S-C-P) paradigm of Joseph Bain, under which structural variables (such as seller concentration) were modeled to affect conduct variables (such as collusion or competition) which in turn were to affect performance variables (such as profits). J. Bain, Industrial Organization 43 (2d ed. 1968). Although conduct can conversely affect structure, see, e.g., infra note 4 (predatory behavior will influence seller concentration), such feedback effects are beyond the scope of this Article. Bains S-C-P paradigm has gained widespread acceptance. See, e.g., F. Scherer, Industrial Market Structure and Economic Performance 3-7 (2d ed. 1980); Weiss, The Structure-Conduct-Performance Paradigm and Antitrust, 127 U. Pa. L. Rev. 1104 (1979). 2. For example, Judge Richard Posner has championed a structural approach for detecting and punishing antitrust collusion. See R. Posner, Antitrust Law: An Economic Perspective 55 (1976); R. Posner & F. Easterbrook, Antitrust: Cases, Economics Notes and Other Materials 336 (1981); 6 P. Areeda, Antitrust Law ? 1430, at 178-82 (1986). 3. The Federal Trade Commission has examined structural characteristics to focus investigative resources on suspect industries. For a history of the FTCs attempts at targeting collusion, see D. Pender & M. Coate, Case Generation and Remedies 8 (F.T.C. Collusion Project Working Paper No. 3, June 29, 1984) (unpublished paper on file at the Columbia Law Review). 4. At least one court has considered structural evidence as a plus-factor for inferring the actual existence of collusion. See, e.g., Wall Products Co. v. National Gypsum Co., 326 F. Supp. 295 (N.D. Calif. 1971) (stressing structural characteristics of the relevant market that predisposed it to collusion); see also R. Posner, supra note 2, at 73 & n.52 (discussing implications of case). While this Article investigates how structure affects collusive behavior-that is, efforts to make competitors cooperate-the structural approach also applies to identifying

Threatening inefficient performance

Louis Kaplow and Stven Shavell have shown that liability rules tend to efficiently harness the defendant’s private information when courts are imperfectly informed as to litigants’ valuations. But they claim that liability rules cannot harness private information when the disputants’ valuations are correlated. This article rejects the correlated‐value claim. While correlated valuations create real problems of implementation, Kaplow and Shavell’s own harnessing result can be extended to redeem the usefulness of liability rules. When values are correlated, enlightened courts can enlarge the damages that takers expect to pay so as to induce efficient takings. The relative efficiency of property and liability rules turns out to be independent of whether the disputants’ values are correlated.

Evidence and Extrapolation: Mechanisms for Regulating Off-Label Uses of Drugs and Devices

Abstract Contract scholars have long understood that inefficient behavior might arise when promisors threaten to breach, but a parallel problem has gone virtually unnoticed: threatening to perform. A potential plaintiff owed a duty by another (such as a contractual promisee) may seek inefficient injunctive relief instead of damages to induce the defendant to pay an amount higher than court-awarded damages. Threats of inefficient performance can produce inefficiency in the form of negotiation costs, failure to reach a bargain, and inefficient ex ante actions. We consider a legal reform that would undermine the credibility of inefficient threats by giving defendants two options: an option to make any injunctive relief inalienable, and an option to commit to paying higher damages. These options would retain the prime benefit of an alienable injunction, the elimination of the threat of undercompensation, while reducing the inequitable risk of overcompensation. As an alternative method of undermining threats, we suggest that judges consider imposing a settlement cap, or subjecting all injunctive settlements to the same type of remittitur analysis to which a jury award would be subjected.

Innovation Sticks: The Limited Case for Penalizing Failures to Innovate

A recurring, foundational issue for evidence-based regulation is deciding whether to extend governmental approval from an existing use with sufficient current evidence of safety and efficacy to a novel use where such evidence is currently lacking. This “extrapolation” issue arises in the medicines context when a drug or device is being considered for (i) new conditions (such as treating off-label diagnostic categories), (ii) new patients (such as treating new sub-populations), (iii) new dosages or durations, or (iv) when the drug or device is itself new, but related to an approved counterpart. While the logic of pre-approval testing would counsel toward prohibiting extrapolation approvals until after traditional safety and efficacy evidence exists, such delays would unreasonably sacrifice some beneficial uses. This article instead proposes a more dynamic and evolving evidence-based regime. Just as probationary hiring can be dynamically efficient when ex ante due diligence is overly costly, a system that allows interim periods of use can provide physicians and patients greater treatment options while providing regulators with valuable evidence about the safety and efficacy of the proposed extrapolation. The harm of accessing unsafe products must be balanced against the harm of restricting access to beneficial products.Our approach calls for improvements in reporting, testing, and enforcement regulations to provide a more layered and nuanced system of regulatory incentives. First, we propose a more thorough-going reporting of off-label use (via the disclosure of diagnostic codes and “detailing” data) in manufacturer annual reports to the Food and Drug Administration (FDA), in the adverse event reports to the FDA, in Medicare/Medicaid reimbursement requests and, for a subset of FDA designated drugs, in prescriptions themselves. Second, we would substantially expand the agency’s utilization of post-market testing, and we provide a novel framework for evaluating the need for post-market testing. Finally, our approach calls for a tiered labeling system that would allow regulators and courts to draw finer reimbursement and liability distinctions among various drug uses and provide the agency both the regulatory teeth and the flexibility it presently lacks. Together, these reforms would improve the role of the FDA in the informational marketplace underlying physicians’ prescribing decisions, without the need for new law-making. This evolutionary extrapolation framework could also be applied to other contexts.

Diversification Across Time

When policymakers and academics think about designing optimal innovation incentives, they almost exclusively limit their considerations to alternative types of reward incentives. But in this article, we show that under specific circumstances innovation sticks – potential penalties for failure to innovate – can play a valuable role in our innovation policy, either alone or in conjunction with innovation carrots. What’s more, we provide examples of several innovation sticks that already have been used with apparent success, including the Federal Corporate Average Fuel Economy (CAFE) standards. Finally, we apply our approach to a new area to which we think innovation sticks may be well-suited: the problem of car fatalities. Our model suggests that a relatively simple system of yardstick penalties could help reduce national auto fatalities by as much 20%, simply by bringing laggard entities (companies and states) up to the median.