Yair Listokin

Does More Crime Mean More Prisoners? An Instrumental Variables Approach

This paper studies the �mechanical theory� of crime and incarceration—�the notion that changes in imprisonment are partially determined by changes in crime rates. Previous studies found scant evidence supporting the mechanical theory. These studies, however, failed to properly control for simultaneity between incarceration rates and crime rates. While more crime may lead to larger prison populations, rising incarceration rates may deter crime. To address this bias, abortion rates in the 1970s are used as an instrument for crime in later decades. Abortion rates in the 1970s are correlated with crime in the 1990s but are unlikely to be otherwise related to incarceration or prison admissions rates in the 1990s. The instrumental variables approach finds that the estimated elasticity of prison admissions with respect to crime is approximately 1, in accord with the mechanical theory. This finding has important implications for understanding trends in the U.S. prison population.

Efficient Time Bars: A New Rationale for the Existence of Statutes of Limitations in Criminal Law

This paper proposes a novel normative economic explanation for statutes of limitations for criminal offenses. Because potential criminals tend to discount the future at higher rates than society, punishing crimes long after they are committed will be inefficient. Punishments after a long lag have only a nominal deterrent effect, while they may cost society substantial sums. The model presented in the paper derives the optimal statute of limitations for a crime by modifying the standard model of public enforcement of law to consider lags between crime and punishment. In addition, numerical simulations of the model suggest that some U.S. statutes of limitations are generally consistent with optimal limitations (probably serendipitously). Finally, the paper employs the model to critique several tenets of the law concerning statutes of limitations.

Do Lawyers Really Believe Their Own Hype and Should They?: A Natural Experiment

Existing research suggests that practicing litigators are too confident in the merits of their clients’ cases. But practicing attorneys often self select (1) the area of law in which they practice, (2) the side on which to practice within that area, (3) law firms with whom they practice, and (4) the clients they represent. We explore whether, after stripping away these selection-biases, legal advocates are still overconfident in their clients’ claims by exploiting a natural experiment involving participants in moot court competitions at three U.S. law schools. Students are randomly assigned to advocate for either petitioner or respondent, so none of the selection-bias problems above are present. We find that following participation in moot court contests, students overwhelmingly perceive that the legal merits favor the side that they were randomly assigned to represent. We also find that overconfidence is associated with poorer performance in advocacy as measured by legal writing instructors. Theoretical and practical implications are discussed.

Bayesian Contractual Interpretation

Courts seeking the most likely intent of contracting parties should interpret contracts according to Bayes’s rule. The best interpretation of a contract reflects both the prior likelihood (base rate) of a pair of contracting parties having a given intention and the probability that the contract would be written as it is given that intention. If the base rate of the intention associated with the simplest reading of the contract is low, then Bayes’s rule implies that the simplest reading is not necessarily the interpretation of the contract that most likely captures the intention of the parties. The Bayesian framework explains when default rules should be more or less sticky and helps to define the appropriate role of boilerplate language in contractual interpretation.

Rethinking Corporate Law During a Financial Crisis

Since the Financial Crisis of 2008, most reform measures and discussions have asked how the law of financial regulation could be improved to prevent or mitigate future crises. These discussions give short shrift to the role played by corporate law during the Financial Crisis of 2008 and other financial crises. One critical regulatory tool during the crisis was “regulation by deal,” in which healthy financial firms (“acquirers”) would hastily acquire failing firms (“targets”) to mitigate the crisis. The deals were governed by corporate law, so corporate law played an outsize role in the response to the crisis. But few observers have asked how corporate law—in addition to financial regulation—should govern dealmaking in financial crises. To fill in this gap, this Article focuses on the role played by corporate law during the Financial Crisis of 2008, and asks whether corporate law should be different during a financial crisis than in ordinary times. Using an externality framework—failure of a systemically important firm can harm the entire economy, and not just the shareholders of the failed firm—this Article identifies a key problem with the current corporate law regime as applied in financial crises: the shareholder value maximization principle as applied to failing target companies. This principle, manifested in the form of shareholder voting rights on mergers and board fiduciary duties to shareholders, is inapplicable to systemically important target firms whose failure would have enormous negative externalities on the rest of the economy. This Article contends that corporate law as applied to systemically important, failing target firms during crises should change as follows: (1) replace shareholder merger voting rights with appraisal rights, and (2) alter fiduciary duties so that directors and officers of those failing target firms consider the interests of the broader economy.

A Theoretical Framework for Law and Macroeconomics

This Article considers the effects of law within a Keynesian macroeconomic model on the economy. Using the IS/LM model at the heart of “short-run” macroeconomics, I argue that law affects spending (“aggregate demand”) and that the changes in spending induced by law can affect output. I contrast the law and macroeconomic perspective with the law and microeconomic approach that has dominated law and economics. I demonstrate that law’s effects on aggregate demand become particularly important when monetary policy is constrained by the “zero lower bound” on nominal interest rates. At the zero lower bound, interest rates cannot adjust to bring aggregate demand into balance with the economy’s supply potential. Economic output falls short of its potential due to inadequate demand. At the zero lower bound, I argue that some micro-economically disfavored legal instruments, such as command and control regulation crafted to increase spending, become appealing relative to seemingly superior alternative instruments such as Pigovian taxation.

Law and Macroeconomics: The Law and Economics of Recessions

In this Article, I offer a macroeconomic perspective on law that reshapes the microeconomic perspective that currently dominates law and economics. I argue that 1. The economy works one way in ordinary economic conditions, in which supply capacity determines output, and a different way in deep recessions, in which demand for spending determines output. 2. Because the economy functions differently in deep recessions than in ordinary times, a law causes one set of effects in deep recessions and a different set of effects at other times. 3. Because the same law has different effects at different times, law should be different in deep recessions than in other times. Specifically, law should do more to promote spending in deep recessions than in ordinary economic conditions. Because the stakes of deep recessions are so high (tens of trillions of dollars in lost output, countless lives impaired, and political upheaval), I argue that the (significant) costs associated with introducing macroeconomics into law are worth bearing.

The Vickrey-Clarke-Groves “Pivotal Mechanism” as an Alternative to Voting for Organizational Control

Abstract Organizations with multiple stakeholders typically make decisions by following the will of the majority of some subset of stakeholders that are entitled to vote. This Article examines an alternative decisionmaking mechanism - the “pivotal” mechanism developed by Vickrey, Groves and Clarke. Unlike voting, the pivotal mechanism produces efficient outcomes in the presence of heterogeneous voter preferences. Moreover, the mechanism allows control rights to be allocated more widely, reducing the costs of opportunism when a controlling class of stakeholders has interests adverse to another class. These benefits come with costs. The pivotal mechanism’s efficiency diminishes in the presence of collusion between voters and requires the creation of “pools” that disperse revenues created by the mechanism. The mechanism is therefore most attractive when the costs of heterogeneity are large and the risks of collusion are small. As a result, I propose the development of a legal basis for the pivotal mechanism as a menu option for organizational decision-making.

The Metric System of State Income Taxes

The residents of six US states (Alabama, Iowa, Louisiana, Missouri, Montana, and Oregon) get to exclude or deduct all or part of their federal income taxes paid when they calculate their taxable income for state income tax purposes. Critics have called this deduction “costly and regressive.” The critics are probably right, but not for the reasons they think. The critics of the deduction overlook the fact that the states that allow deductibility of federal income tax for state tax purposes use a different state income “tax base” or “scale” than other states. Most state income tax regimes use a tax base that includes federal income taxes paid (we call it FTI), but the six states listed above use an income tax base that excludes federal income taxes (the FTE base). The two tax bases can translated from one to the other. Indeed, this paper provides original formulae for converting the FTE base into its FTI equivalent and vice verce. Because of this equivalence, one state income tax base is not a priori better than another. But when we convert FTE income tax bases into their FTI equivalents, we find a pervasive trend. States with FTE income tax regimes systematically have more regressive income tax regimes than states with FTI bases. We argue that taxpayers and legislators under-adjust relative to our translation formula when comparing FTE regimes to FTI regimes, causing the systematic regressive trend in states with FTE regimes.