Sarath Sanga

Reconsidering Racial Bias in Motor Vehicle Searches: Theory and Evidence

Knowles, Persico, and Todd (2001) present a model of police and motorist behavior in the context of vehicle searches and test it using data from Maryland. Their work marked a resurgence in interest on how to interpret purported evidence of statistical and racial discrimination. The main implication of the their model is that in the absence of racial discrimination, the proportion of searches yielding drugs (or “hit rate”) will be equated across races. A relatively low hit rate for any group suggests that police may improve their overall hit rate by shifting resources away from that group and is thus evidence toward discrimination. Using data on vehicle searches by the Maryland State Police (MSP), they find no bias against blacks relative to whites but significant bias against white females and particularly Hispanics.In this paper, I reconsider the Knowles et al. analysis. An important feature of the data used by Knowles et al. is that they are limited to searches occurring on Interstate 95, which was also the focus of the racial profiling lawsuit filed against the MSP in 1993. However, while the suit focused on I-95 searches, the settlement required the MSP to record all vehicle searches, of which I-95 searches constitute about one-third. When considering all MSP searches, I find evidence toward racial discrimination against blacks and especially Hispanics, and that these disparities have increased in recent years.

Incomplete Contracts: An Empirical Approach

The strategic ambiguity hypothesis posits that when some aspects of performance are observable but not verifiable, the optimal contract is deliberately incomplete. I test this result for the first time. Because a direct test is infeasible, I derive an equivalent result: incompleteness is optimal when some terms are legally void. I test this using executive contracts from S&P 500 firms. I find that firms pay severance in discretionary installments to induce their executives to comply with noncompete agreements—but only in California, where noncompetes are void. Outside California, noncompetes are valid and these same firms pay non-discretionary severance upfront. I conclude that firms use strategic ambiguity to circumvent legal constraints.

Network Effects in Corporate Governance

Most public companies incorporate in Delaware. Is this because they prefer its legal system or are they simply following a trend? Using the incorporation histories of over 22,000 public companies from 1930 to 2010, I show that firms are more influenced by changes in each others decisions than by changes in the law. The analysis exploits an unexpected legal shock that increased Delawares long run share from 30 to 74 percent. I attribute most of this change to a cascading effect in which the decisions of past firms successively influence future cohorts. Delaware firms also enjoyed abnormal returns precisely during those years in which the Delaware network grew most. I conclude that network effects dominate secular trends in corporate governance.