Omri Ben-Shahar

The Futility of Cost Benefit Analysis in Financial Disclosure Regulation

What would happen if cost-benefit analysis (CBA) were applied to disclosure regulations? Mandated disclosure has largely escaped rigorous CBA because it looks so plausible: disclosure seems rich in benefits and low in cost. This article makes two arguments. First, it previews our thesis in More Than You Wanted to Know that disclosure laws do not deliver their anticipated benefits and thus cannot easily pass quantified CBA. Second, it describes a previously unrecognized cost of disclosure, one arising from lawmakers’ collective-action problem. With the proliferation of disclosures, each new mandate diminishes the attention that people can give to other information, including all other disclosures. The problem for CBA is lawmakers’ inability to coordinate laws across different fields and jurisdictions. This article illustrates this regulatory failure by examining the rigorous cost-effectiveness analysis conducted by the Consumer Financial Protection Bureau for its recent mortgage disclosure regulation.

Outsourcing Regulation: How Insurance Reduces Moral Hazard

This article explores the potential value of insurance as a substitute for government regulation of safety. Successful regulation of behavior requires information in setting standards, licensing conduct, verifying outcomes, and assessing remedies. In some areas, the private insurance sector has technological advantages in collecting and administering the information relevant to setting standards, and could outperform the government in creating incentives for optimal behavior. The paper explores several areas in which regulation and other government-oriented forms of control are replaced by private insurance schemes. The role of the law diminishes to the administration of simple rules of absolute liability or of no liability, and affected parties turn to insurers for both risk coverage and safety instructions. The paper illustrates the existing role of regulation-through-insurance in various areas of risky activity, and then explores its potential application in additional, yet unutilized, areas: (1) consumer protection; (2) food safety; and (3) financial statements.

Boilerplate and Economic Power in Auto Manufacturing Contracts

This article studies the standard form contracts used by automobile manufacturers to purchase auto parts. It explores how the contracts reflect divisions of bargaining power, asymmetric information, problems of hold-up and renegotiation, and market competition. Based on interviews with representatives of buyers and suppliers, the article also describes the process of drafting the forms, the negotiation over price and other terms in the shadow of these forms, and the opportunities for non-drafters to extract improved terms. Some of the main lessons are: (i) The terms of the contracts and the bidding process prevent ex-post hold-up by suppliers (in contrast to the claims made by Benjamin Klein and others based on the GM/Fisher Body contract); (ii) There is surprisingly little ad-hoc tailoring of terms, even when such tailoring can increase the surplus from the deal; (iii) Internal organization structures are harnessed effectively to secure favorable bargaining outcomes; (iv) There is a significant variation between the standard forms utilized by the big automakers, in some of the most important aspects of the deals. This variation suggests that some of the terms are inefficient.

Playing without a rulebook: Optimal enforcement when individuals learn the penalty only by committing the crime

This paper argues that enforcement can be designed not only to deter individuals, but also to inform them. Individuals may commit sanctionable acts while being imperfectly informed about the governments enforcement policy. By engaging in behavior repeatedly, and getting caught occasionally, individuals learn some of the information over time. In this setting, Beckers argument for imposing maximal sanctions along with a low probability of apprehension may not hold. Raising the probability of apprehension increases the number of occasions in which individuals get caught, giving them more opportunities to learn the enforcement policy. The acquired information improves behavior, a benefit that may exceed the added enforcement cost.

The Law of Duress and the Economics of Credible Threats

This paper argues that enforcement of an agreement, reached under a threat to refrain from dealing, should be conditioned solely on the threats credibility. When a credible threat exists, enforcement promotes social welfare and the threatened partys interests. If agreements backed by credible threats were not enforceable, the threatening party would not extort them and would instead refrain from dealing—to the threatened partys detriment. The doctrine of duress, which invalidates such agreements, hurts the coerced party. By denying enforcement when a credible threat exists, the duress doctrine precludes the threatened party from making the commitment necessary to reach agreement. Paradoxically, the duress doctrine renders performance less likely, thereby reducing incentives to invest. The paper suggests that courts should replace the duress methodology with a credibility inquiry. It discusses factors that would be relevant under such an inquiry. Finally, it demonstrates applications of this approach to leading contract modification cases.

The Perverse Effects of Subsidized Weather Insurance

This Article explores the role of insurance as substitute for direct regulation of risks posed by severe weather. In pricing the risk of human activity along the predicted path of storms, insurance can provide incentives for efficient location decisions as well as for cost-justified mitigation effort in building construction and infrastructure. Currently, however, much insurance for severe weather risks is provided and heavily subsidized by the government. The Article demonstrates two primary distortions arising from the government’s dominance in these insurance markets. First, the subsidies are allocated differentially across households, resulting in a significant regressive redistribution, favoring affluent homeowners in coastal communities. The Article provides some empirical measures of this effect. Second, the subsidies induce excessive development (and redevelopment) of storm-stricken and erosion-prone areas. While political efforts to scale down the insurance subsidies have so far failed, by exposing the unintended costs of government-subsidized insurance this Article contributes to reevaluation of the social regulation of weather risk. * Ben-Shahar is the Leo and Eileen Herzel Professor of Law at the University of Chicago Law School. Logue is the Wade H. and Dores M. McCree Collegiate Professor of Law at the University of Michigan Law School. We are grateful to Kevin Jiang, Michael Lockman, and John Muhs for research assistance and to Jim Hines, William Hubbard, and Ariel Porat for helpful comments. Ben-Shahar acknowledge financial support from the Coase-Sandor Institute for Law and Economics at the University of Chicago Law School.

Reconsidering Racial and Partisan Gerrymandering

This article investigates the distinction between breach of license and infringement of property rights, and how damages ought to be measured for each. It identifies two remedial puzzles. First, under current law the line between breach of a license contract and infringement of a property right is murky, and thus minor differences between violations could lead to major differences in damage measures. Second, damages for infringement are augmented in a subtle but distortive way, by giving owners an option to choose between the greater of two computation measures, each based on different information. The article argues that these existing remedial patterns are not justified. If provides an alternative framework for determining whether a violation is breach or infringement. In a nutshell, violations involving activities that an owner would want to license in a separate transaction, or not to license at all, should be regarded as infringements and sanctioned more severely.

The (Legal) Pains of Vioxx: Why Product Liability Can Make Products More Dangerous

Comparing the experience of Vioxx and Celebrex leads Omri Ben-Shahar to think that stiff product liability has the perverse effect of inducing manufacturers of defective products to leave these products on the market, rather than withdraw them.

Contracting Over Privacy: Introduction

This short essay introduces papers presented at the symposium Contracting over Privacy, which took place at the Coase-Sandor Institute for Law and Economics at the University of Chicago in fall 2015. The essay highlights a quiet legal transformation whereby the entire area of data privacy law has been subsumed by consumer contract law. It offers a research agenda for privacy law based on the contracting-over-privacy paradigm.

Mutual Assent versus Gradual Ascent: The Debate over the Right to Retract

I ended Contracts Without Consent: Exploring a New Basis for Contract Liability with a reminder that the analysis was “lacking in rigor and in nuance” and that “[i]t remains for future work to explore the extent to which the approach developed . . . has the horsepower to resolve pragmatically the problems that have proven difficult for current doctrine and to examine whether these solutions advance the various social objectives associated with contract formation.” Such “future work” arrived sooner than I expected. I have now had the privilege to read the three commentaries that the University of Pennsylvania Law Review solicited, three razor-sharp critiques, producing precisely what I hoped would follow: an exploration, balanced with both theoretical nuance and empirical pragmatism, of the implications that flow from the no-retraction regime. And I may ultimately have to concede that much is still unresolved (or at least not convincingly resolved) by the proposed regime. But before we reembrace the traditional way of thinking about contracts, it may be worth our while to take a moment to understand the scope and the validity of the critiques and to determine whether a fine-tuned account of the noretraction regime emerges with the aid of such understanding. The commentaries to Contracts Without Consent occupy a continuum between the curious and the angry. On the one hand, it is viewed charitably as an “intriguing” and “appealing new approach,” embraced as a potential “new and promising beginning” of what can