Matthew L. Spitzer

Endowment Effects Within Corporate Agency Relationships

Behavioral economics is an increasingly prominent field within corporate law scholarship. A particularly noteworthy behavioral bias is the “endowment effect”—the observed differential between an individuals willingness to pay to obtain an entitlement and her willingness to accept to part with one. Should endowment effects pervade corporate contexts, they would significantly complicate much common wisdom within business law, such as the presumed optimality of ex ante agreements. Existing research, however, does not adequately address the extent to which people manifest endowment effects within agency relationships. This article presents an experimental test for endowment effects for subjects situated in an agency relationship that typifies many firms. We find that subjects do not exhibit significant endowment effects. An additional experimental test suggests that this finding may be largely due to framing: subjects situated as “agents” may view entitlements principally in terms of exchange value, thereby dampening endowment.

Term Limits and Representation

Legislative term limits have now been instituted in over a dozen states. Proponents have seized the opportunity to extend them more generally, and have introduced ballot propositions in another half-dozen states; victory seems likely in at least some of them. Meanwhile, opponents have taken their fight to the courts. In the 94–95 term, the Supreme Court will hear an appeal of the term limits provision in Arkansas. The issue has generated an enormous literature, both popular and academic. This paper is concerned with one facet of the debate: how term limits affect the incentives of legislators to represent the wishes of their constituents.1

On Experimentation and Real Options in Financial Regulation

Financial regulators have recently faced enhanced judicial scrutiny of their cost-benefit analysis (CBA) in advance of significant reforms. One facet of this scrutiny is judicial skepticism toward experimentation (and the real option to abandon) in the CBA calculus. That is, agencies have arguably been discouraged from counting as a benefit the value of information obtained through adopting new regulations on a provisional basis, with an option to revert to the status quo in the future. We study field experimentation versus more conventional forms of CBA (or analytic learning) in a regulatory-judicial hierarchical model. We demonstrate that there is no principled basis for dismissing (or demoting) experimentalism and that such rationales deserve a place in agencies’ standard CBA arsenals. Nevertheless, our analysis also reveals an institutional reason for the tension between the judiciary and regulators, suggesting that regulators are plausibly too eager to embrace field experimentation while judges are simultaneously too recalcitrant.

Patently Risky: Framing, Innovation and Entrepreneurial Preferences

It is well known that innovation law and policy must strike a balance between incentivizing inventions on the one hand, and granting monopolies to successful innovators on the other. In achieving this balance, it is commonly presumed that actors in innovation markets respond to their economic environments just like anyone else (at least on a first approximation). This paper presents evidence to the contrary, using a series of controlled experiments. In our experiments, subjects were offered a choice between (a) a monetary payoff with certainty; and (b) a riskier (but potentially more lucrative) option. Our principal manipulation was to alter how the latter option was framed: subjects in the control group were presented with an unadorned choice between safe and risky options, while subjects in the treatment group were confronted with the identical economic choice, but with the risky option framed as an investment in an “innovation-related” project. We find strong evidence that when the risky choice was framed in this way, subjects exhibited significantly less risk aversion, and that they did so across many variations on the experimental setting. We calibrate our results to an equivalent downward “shock” that the innovation-related frame introduces to subjects’ manifest risk preferences. Our findings have implications for legal design questions, not only within intellectual property but also in other legal settings (such as venture capital) where the need to account for people’s risk tolerance plays an important role.

The Enduring Power of Coase

By many measures, Ronald Coase has been among the most influential economists of the past 60 years. Why is this so? We suggest that Coase’s work has enduring appeal to and insight for social scientists in part because it addresses the biggest and most important social problems: How do we solve governance and coordination problems when limited information, common resource issues, and public good issues produce conflicts among several people at once? Any scholar who works on issues of corporate or common-pool governance, pollution, allocation of seats on legislative committees, regulation of systemic risk in financial markets, provision of military forces, patent thickets, creation of optimal communications networks, regulation of decreasing cost industries, or compensation of corporate officers can see his or her work stemming from several of Coase’s original insights. Just as John Nash’s work reshaped economic theory, almost every field of economics and political science is shaped by Coasean insights.

Unions, Fairness, and the Conundrums of Collective Choice

This article posits that attempts thus far to develop a consistent, principles theory of the duty of fair representation have not been successful. We do not deny that certain particularized rules of fairness derived from various sources can be generated and applied to particular cases. We do not think, however, that there is an intelligible general rule of distributive or procedural fairness that may be interposed by a court to overrule the discretionary decisions made by a union in bargaining for its constituents. This article examines the substantive theories of fairness that have been suggested by courts and commentators.