Oren Bar-Gill

Misreporting Corporate Performance

This paper develops a model of the causes and consequences of misreporting of corporate performance. We model why and when managers of public companies will choose to misreport and to invest in creating opportunities for misreporting. Even managers who cannot sell their shares in the short run might misreport in order to improve the terms upon which the company would be able to issue equity to finance new projects or stock acquisitions. When managers are free to sell some of their holdings in the short-run, incentives to misreport and the incidence of misreportin g i n c r e a s e t o a n e x t e n t d e p e n d i n g o n the fraction of their holdings that managers may sell and on their ability to sell without the market knowing about it. Investments in misreporting have real economic costs and lead to distortions in capital raising decisions, with firms that misreport raising too much equity and firms that do not misreport raising too little. Lax accounting and legal rules increase investments in opportunities to misreport and the incidence of misreporting and, as a result, reduce ex ante share value. Our analysis provides a range of testable predictions concerning the periods, industries, and type of firms in which misreporting is likely to occur. The analysis also has implications for corporate governance and executive compensation.

Crime Rates and Expected Sanctions: The Economics of Deterrence Revisited

A higher expected sanction lowers the crime rate. This intuitive cornerstone of deterrence theory has garnered extensive theoretical and empirical research. The present study focuses on the opposite effects—the effects of the crime rate on the expected sanction. It turns out that these effects are versatile and rich in both the direction and the magnitude of their influence on the expected sanction. After analyzing these countereffects of the crime rate on the expected sanction, we present a new model of deterrence that explicitly incorporates the crime rate as one of the determinants of the expected sanction. The adjusted model is then used to study the effects of the crime rate on deterrence and on optimal law enforcement policy.

The Market for Corporate Law

This Paper develops a model of the competition among states in providing corporate law rules. The analysis provides a full characterization of the equilibrium in this market. Competition among states is shown to produce optimal rules with respect to issues that do not have a substantial effect on managers’ private benefits but not with respect to issues (such as takeover regulation) that substantially affect these private benefits. We analyse why a dominant state such as Delaware can emerge, the prices that the dominant state will set and the profits it will make. We also analyse the roles played by legal infrastructure, network externalities, and the rules governing incorporations. The results of the model are consistent with, and can explain, existing empirical evidence; they also indicate that the performance of state competition cannot be evaluated on the basis of how incorporation in Delaware in the prevailing market equilibrium affects shareholder wealth.

Public Policy with Endogenous Preferences

Public policy may influence norms and preferences. By altering the payoffs associated with different preferences, public policy may influence the distribution of these preferences in the population. Such interdependence between policy and preferences may limit (or enhance) the effectiveness of different policies. We demonstrate this idea with a simple model of subsidizing contributions to a public good. While the short run effect of such a subsidy will be an increase in the overall contribution, the subsidy triggers an endogenous preference change that results in a lower level of contribution to the public good, despite the explicit monetary incentives to raise that level.

The Value of Giving Away Secrets

This Essay demonstrates the strategic advantage of narrow patents and unprotected publication of RD that between the two main theoretic strands in patent law scholarship - the property rights perspective and the information revelation perspective. It also explains the recent trend toward unprotected publication of information. Finally, we propose an important reform of the novelty requirement in patent law that would further encourage narrow patents and unprotected publication by bolstering the credibility of a patentees commitment not to patent previously published research findings.

The Limit Of Public Policy: Endogenous Preferences

In designing public policy it is not enough to consider the possible reaction of individuals to the chosen policy.Public policy may also affect the formation of preferences and norms in a society.The endogenous evolution of preferences, in addition to introducing a conceptual difficulty in evaluating policies, may also eventually affect actual behavior.In order to demonstrate the implications of endogenous preferences on the design of optimal public policy, we present a model in which a subsidy policy is set to encourage contributions towards a public good.However this policy triggers an endogenous preference change that results in a lower level of contribution towards the public good despite the explicit monetary incentives to raise that level.

Informing Consumers About Themselves

Consumers make mistakes. Imperfect information and imperfect rationality lead to misperception of benefits and costs associated with a product. As a result, consumers might fail to maximise their preferences in product choice or product use. A proposed taxonomy of consumer mistakes draws attention to a less-studied category of mistakes: use-pattern mistakes – mistakes about how the consumer will use the product. Use-pattern mistakes are prevalent. Sellers respond strategically to use-pattern mistakes by redesigning their products, contracts and pricing schemes. These strategic design responses often exacerbate the welfare costs associated with consumer mistakes. From a policy perspective, focusing on disclosure regulation, the importance of use-pattern mistakes requires more, and better, use-pattern disclosure. In particular, sellers should be required to provide individualised use-pattern information.

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.

Pricing Misperceptions: Explaining Pricing Structure in the Cell Phone Service Market

The common pricing structure in the cellular service market is a three-part tariff comprising: (1) a monthly charge; (2) a number of allotted minutes – talking minutes that the monthly charge pays for; and (3) an overage charge – a per-minute price for minutes beyond the plan limit. We argue that the three-part tariff is a rational response by sophisticated carriers to consumer misperception about their cell-phone usage. In particular, the three-part tariff is advantageous to carriers, because it exacerbates the effects of consumer misperception, leading consumers to underestimate the cost of cellular service. We develop a simple model that formalizes this account. We then proceed to test our theory using a unique dataset of subscriber-level, monthly billing and usage information for 3,730 subscribers at a single wireless provider. Policy implications are discussed.

Product Use Information and the Limits of Voluntary Disclosure

Concern about asymmetric information in markets for consumer goods and services has focused on product-attribute information. We highlight the importance of another category of information--product-use information. In important markets, sellers have better information about how a consumer will use their product or service than the consumer herself. Moreover, we show that the classic unraveling results do not extend to product-use information, and thus sellers are less likely to voluntarily disclose this type of information. Our findings have important policy implications: While most disclosure mandates target product-attribute information, our analysis suggests that mandating disclosure of product-use information may be more important. Indeed, policy makers are beginning to recognize the importance of product-use disclosures. Copyright 2012, Oxford University Press.