Peter Z. Grossman

The Meaning of Property Rights: Law versus Economics?

Property rights are fundamental to economic analysis. There is, however, no consensus in the economic literature about what property rights are. Economists define them variously and inconsistently, sometimes in ways that deviate from the conventional understandings of legal scholars and judges. This article explores ways in which definitions of property rights in the economic literature diverge from conventional legal understandings, and how those divergences can create interdisciplinary confusion and bias economic analyses. Indeed, some economists’ idiosyncratic definitions of property rights, if used to guide policy, could lead to suboptimal economic outcomes.

The Market for Shares of Companies with Unlimited Liability: The Case of American Express

If share ownership entailed unlimited liability, would there be an active stock market? Some legal scholars have maintained that no liquid stock market could exist. Others have claimed the result would depend on the specific liability rule. But little empirical evidence has been cited to support any single theory. This article tests four theories of the effect of liability rules on stock market behavior through a study of trading in shares of the American Express Company during the 1950s, when these shares carried pro rata unlimited liability. This study shows that American Express stock traded regularly among a diverse group of shareholders and was not deemed especially risky by the market. The evidence suggests that limited liability is not a necessary condition for the functioning of markets for company shares.

The logic of deflective action: US energy shocks and the US policy process

Exogenous shocks may lead to policies that seem extreme and even “irrational”. This paper argues that, in the event of a major energy shock in the US that persists, such legislation is an inevitable response to the demand from constituents that political actors “do something”. Since shocks by their nature are unanticipated and are often highly technical and complex, boundedly rational legislators cannot generally understand all of the ramifications of the shock, much less hope to craft well-considered and precise legislation to deal with it. But the demand to “do something” means that a range of actions is politically necessary. The “shock” policy process is modelled as a stepwise legislative decision problem. If the crisis persists, legislation that promises a solution is likely to be the result, even if this “solution” is infeasible. The model is applied to five US energy shocks.

Toward a Total-Cost Approach to Environmental Instrument Choice

Most theories of environmental instrument choice focus exclusively on differential compliance costs. But compliance costs comprise only part of the total costs of environmental protection. Administrative costs - particularly the costs of measuring emissions and monitoring compliance - can differ significantly between environmental instruments. Those administrative cost differentials may offset the compliance cost advantages commonly associated with economic instruments, such as tradeable permits and effluent taxes. Moreover, measurement and monitoring constraints may increase ex ante uncertainty over the differential costs and benefits of alternative regulatory policies. That uncertainty may militate against selecting regulatory instruments that appear superior from the perspective of models focusing exclusively on compliance-cost differentials.

Determinants of share price movements in emerging equity markets:: Some evidence from america's past

Abstract Emerging equity markets are plagued by poor information, which is a barrier to outside shareholder participation. This paper examines the determinants of share prices of two United States companies over a 14-year period during the late 19 th century, when America had an emerging equity market. These two companies withheld all information on profits and assets until the end of the period, yet traded regularly. Overall, the evidence suggests that outside investors received sufficient compensation for their ignorance, and that these outsiders set the market price. An event study shows that when information about company assets was revealed, market returns were significantly changed.

The Dilemma of Prisoners

Stalins Great Terror was one of historys most massive political purges. In its form, the Terror resembled a one-shot, n-person prisoners dilemma game. Although the Terror could not have been sustained if prisoners cooperated, most prisoners defected against one another, as the model would predict. Yet the record of the Terror also demonstrated that in a mass purge there exists a wider strategy set than that of the prisoners dilemma game. Using an illustrative case and a generalized model of purges, it is shown that if prisoners implicate their interrogators and play what is called a “transformation” strategy, they raise the cost to the authority of conducting the purge. In fact, the authority has no consistent best response to the transformation, and the purge should not be sustainable for long thereafter. The Great Terror was apparently limited by employment of this transformation. Limitations on the formation and use of such a strategy are also considered.

Environmental instrument choice in a non-linear world

ABSTRACT The substantial literature on environmental instrument choice under uncertainty has provided valuable insights using simplifying assumptions of linear marginal cost and benefit curves and additive error terms to determine when and why a price or quantity instrument should be preferred. But empirical analysis has shown that linearity and additivity are not the norm. This paper explores the formal properties of instrument choice when the marginal benefit and marginal cost curves are non-linear; the error term is multiplicative and assumed to be exponential; and the choice is expanded to include comparisons among different price and different quantity regimes, as well as choices between these types. In this more realistic environment, we show that small changes in variance and parameter values can have a significant impact on optimal instrument choices.

Protecting Private Property with Constitutional Judicial Review: A Social Welfare Approach

This article uses a social welfare approach to determine if and when the institution of constitutional judicial review of property regulation and expropriation is efficient. A model is proposed in which property rights protection is a component of social costs. Constitutional judicial review is assumed to either add to or subtract on net from those costs, affecting social welfare generally. It will be shown that under realistic conditions, reflected in real instances, that constitutional judicial review might not enhance economic efficiency or overall social welfare. We show that the efficiency of constitutional judicial review is likely to vary within the larger institutional context.