Research

Corporate Social Responsibility through Shareholder Governance

(with Robert Bartlett), 97 Southern California Law Review 417 (2024)

New approaches to corporate purpose have emerged in recent years that hold out the promise of addressing concerns about corporate social responsibility (“CSR”) through shareholder governance, rather than in spite of it. The seminal such approach—enlightened shareholder value—posits that treating other stakeholders well can ultimately redound to long-term shareholder value. However, two more recent proposals reconceptualize shareholder interests in more holistic ways and urge that it is shareholders' welfare, not shareholder value per se, that managers should pursue. In particular, the “shareholder social preferences” view incorporates into the corporate objective the degree to which the firm's operations align with the social views of shareholders. The “portfolio value maximization view,” in contrast, argues that corporate fiduciaries should maximize the value of diversified shareholders' portfolios by considering the externalities of the firm's operations on those portfolios. Shifting to shareholder welfare as the corporate objective, however, would do little to improve corporate conduct and would entail substantial costs. The social preferences of shareholders are conflicted, muted, and often prefer less protection of stakeholder interests than provided by law. Shareholders' portfolio value captures only a small portion of the externalities like pollution that its proponents hope to address and risks motivating anticompetitive conduct. And neither corporate managers nor shareholders would have the information and incentives needed to pursue these additional shareholder welfare considerations. On the contrary, by distracting management from their core competencies, shareholder welfarism would ultimately lower shareholder welfare. The future of CSR, as with its past, is instead with enlightened shareholder value.

The Party Structure of Mutual Funds

(with Emiliano Catan), 35 Review of Financial Studies 2839 (2022)

We investigate the structure of mutual funds' corporate governance preferences as revealed by how they vote their shares in portfolio companies. We apply unsupervised learning tools from the machine learning literature to analyze mutual funds' votes and find that a parsimonious two-dimensional model can explain the bulk of mutual fund voting. The dimensions capture competing visions of corporate governance and are related to the leading proxy advisors' recommendations. Cluster analysis shows that mutual funds are organized into three “parties”—the Traditional Governance Party, Shareholder Reform Party, and Shareholder Protest Party—that follow distinctive philosophies of corporate governance and shareholders' role.

Choosing the Partnership: English Business Organization Law During the Industrial Revolution

38 Seattle University Law Review 337 (2015)

For most of the period associated with the Industrial Revolution in Britain, English law restricted access to incorporation and the Bubble Act explicitly outlawed the formation of unincorporated joint stock companies with transferable shares. Furthermore, firms in the manufacturing industries most closely associated with the Industrial Revolution were overwhelmingly partnerships. These two facts have led some scholars to posit that the antiquated business organization law was a constraint on the structural transformation and growth that characterized the British economy during the period. This article examines whether the restrictions on access to the joint stock form could have influenced Britain's economic performance by hindering capital accumulation during the Industrial Revolution.

Review of Good Company, by Lenore Palladino

Journal of Economic Literature (forthcoming)

This review evaluates Lenore Palladino's Good Company: Economic Policy after Shareholder Primacy, which argues that the American embrace of shareholder primacy since the 1980s has actively shrunk the economic pie by hollowing out the productive capacity of the firm. Drawing on William Lazonick's theory of the innovative enterprise, Palladino contends that genuine innovation depends on cumulative learning processes that flourish only when firms dedicate retained earnings to developing capabilities over time, and that shareholder primacy disrupts this vital process. The review welcomes Palladino's call to evaluate governance structures based on their effects on innovation capacity, not merely on equity prices or distributive outcomes, while noting that the book's most sweeping claims are its least persuasive. The standard justification for shareholder control does not depend on the relative magnitude of shareholders' contributions, and the assertion that “the corporation owns itself” does not provide an affirmative reason for reallocating control.

An Equilibrium Theory of Retirement Plan Design

(with Patrick Warren), 12 American Economic Journal: Economic Policy 22 (2020)

We develop an equilibrium theory of employer-sponsored retirement plan design using a behavioral contract theory approach. The operation of the labor market results in retirement plans that generally cater to, rather than correct, workers' mistakes. Our theory provides new explanations for a range of facts about retirement plan design, including the use of employer matching contributions and the use of default contribution rates in automatic enrollment plans that lower many workers' savings. We provide novel evidence for our theory from a sample of plans.

A Behavioral Contract Theory Perspective on Retirement Savings

(with Patrick Corrigan, Patrick Warren), 47 Connecticut Law Review 1317 (2015)

The primary motivation for retirement savings policy is the view that many of us, if left to our own devices, will not save enough for retirement. Special tax subsidies for employer-sponsored retirement plans—a principal component of the federal policy scheme—have made such plans the predominant vehicle for private savings for retirement. A growing body of evidence shows that the details of plan design can have large effects on savings outcomes. The design of the “choice architecture” of these plans, however, is delegated to employers. We analyze the incentives for employer plan design produced by the labor market. Employers offer retirement plans to attract workers. If those workers make systematic mistakes in their retirement savings decisions, then the labor market will produce incentives for plan designs that generally fail to effectively address the problems. Indeed, the presence of workers who undersave due to myopia results in equilibrium employer plan designs that exploit the myopic by lowering their total compensation. Our analytic framework provides novel explanations for a range of features of plan design, including the high prevalence of matching contributions, the use of low default contribution rates in automatic enrollment plans, the shift away from annuities toward lump sum distributions, and the offering of investment options with excessive fees. The regulation of these plans should be reformed to address the problems with employer incentives that we identify. More fundamentally, our analysis calls for a rethinking of the current scheme's special subsidies for employer-sponsored plans.

Consumer Biases and Mutual Ownership

(with Alex Kaufman), 105 Journal of Public Economics 39 (2013)

We show how ownership of the firm by its customers, as well as nonprofit status, can prevent firms from using contractual terms that take advantage of consumer biases. By eliminating an outside residual claimant with control over the firm, these alternatives to investor ownership reduce the incentive of the firm to offer such terms. However, customers who are unaware of their behavioral biases may fail to recognize this advantage of non-investor-owned firms. We present evidence from the consumer financial services market that supports our theory. Comparing contract terms, we find that mutually owned firms offer lower penalties, such as default interest rates, and higher up-front prices, such as introductory interest rates, than do investor-owned firms. However, consumers most vulnerable to these penalties are no more likely to use mutually owned firms.

Credit Card Pricing: The CARD Act and Beyond

(with Oren Bar-Gill), 97 Cornell Law Review 967 (2012)

Selected as one of the Top 10 Corporate and Securities Articles of 2012 by Corporate Practice Commentator

We take a fresh look at the concerns about credit card pricing and empirically investigate whether the Credit CARD Act of 2009 (the CARD Act) has been successful in addressing those concerns. The rational choice theory of credit card pricing, which posits that issuers use back-end fees to adjust the price of credit to reflect new information about borrowers' credit risk, predicts that issuers will respond to the CARD Act by using alternative ways to price risk. In contrast, the behavioral economics theory, which posits that issuers use back-end fees because they are not salient to consumers, predicts that issuers will respond by increasing unregulated nonsalient prices. If the market is competitive, we argue that the CARD Act should also result in increases in some salient, up-front prices. But we show that if issuers have market power, reductions in nonsalient fees may not result in concomitant increases in salient charges. We test these predictions using two datasets on credit card contract terms before and after the CARD Act rules went into effect. We find that the rules have substantially reduced the back-end fees directly regulated by the CARD Act, including late fees and over-the-limit fees. However, unregulated contract terms, such as annual fees and purchase interest rates, have changed little. Post-CARD Act, consumers continue to face high long-term prices and low short-term prices, and imperfectly rational consumers still have difficulty understanding the cost of credit card borrowing. We thus consider potential improvements to the regulatory framework.

Regulating Motivation: A New Perspective on the Volcker Rule

(with Marcel Kahan), 96 Texas Law Review 1019 (2018)

The myriad problems with the Dodd-Frank Act's ban on proprietary trading by banks have led to a rare bipartisan consensus: the Volcker Rule must be pared back or even repealed. At the root of the Rule's problems is the fundamental definitional challenge posed by the current approach. The definition of banned proprietary trading turns on the motivation underlying a trade, which is difficult for regulators to determine. Regulators must adopt either a hardline approach that risks deterring banks from engaging in core financial intermediation functions or a more permissive approach that risks the continuance of speculative gambles that threaten the financial system. We propose a new paradigm for achieving the Volcker Rule's objectives that resolves this dilemma. Rather than define and ban proprietary trading, regulators should simply ban banks from paying traders on the basis of trading profits. Our proposal takes advantage of the competition between proprietary trading firms in two markets: they compete in the securities market to identify and exploit trading opportunities, and they compete in the labor market to hire and motivate the best traders. Because speculative trading is a zero-sum game, handicapping banks relative to unregulated entities, such as hedge funds, in the labor market for traders would generate powerful incentives for banks to get out of the trading game. Our simple compensation-based approach would likely be more effective at ending speculative trading at banks—and do so at lower cost—than the complex and loophole-ridden current approach.

Regulating Against Bubbles: How Mortgage Regulation Can Keep Main Street and Wall Street Safe—from Themselves

(with Prasad Krishnamurthy), 163 University of Pennsylvania Law Review 1539 (2015)

As the Great Recession has painfully demonstrated, housing bubbles pose an enormous threat to economic stability. However, the principal mortgage market reforms in response to the latest boom and bust—the Dodd–Frank Act's provisions on mortgage lending and securitization—are not designed to protect the economy from a housing bubble. Instead, these reforms tinker with the incentives of securitizers and lenders to prevent their exploitation of naive investors and borrowers. In particular, these changes require securitizers to retain credit risk and lenders to assess borrowers' ability to repay. This approach misses the mark. The sine qua non of a bubble is marketwide overoptimism about future house prices. Irrational exuberance in a bubble leads parties across the entire system of housing finance to make risky bets based on rosy beliefs. It is not just investors who underprice credit risk and borrowers who overextend. Securitizers and lenders are also eager to take on dangerous levels of risk and leverage. The Dodd–Frank Act's incentive-based reforms, by relying on rational behavior by supposedly sophisticated parties, will do little to protect the economy from a bubble. They might even increase systemic risk by concentrating mortgage risk in large financial institutions. Because indirect incentive-based regulation is ineffective in a bubble, more direct mandates should be employed. We suggest a number of direct regulations to limit mortgage leverage, debt-to-income levels, and other contractual features that enable or induce borrowers to take out larger loans. We show how such limits can curb bubbles, lower defaults, and reduce household exposure to housing risk.

Securitization and Moral Hazard: Evidence from Credit Score Cutoff Rules

(with Alex Kaufman), 63 Journal of Monetary Economics 1 (2014)

A growing literature exploits credit score cutoff rules as a natural experiment to estimate the moral hazard effect of securitization on lender screening. However, these cutoff rules can be traced to underwriting guidelines for originators, not for securitizers. Moreover, loan-level data reveal that lenders change their screening at credit score cutoffs in the absence of changes in the probability of securitization. Credit score cutoff rules thus cannot be used to learn about the moral hazard effect of securitization on underwriting. By showing that this evidence has been misinterpreted, our analysis should move beliefs away from the conclusion that securitization led to lax screening.

Differentiation through Legal Uncertainty

(with Giuseppe Dari-Mattiacci), 56 Journal of Legal Studies (2026)

This paper challenges the conventional view of legal uncertainty as a purely distortionary force. We argue that for heterogeneous populations, simple legal standards can harness uncertainty to produce socially beneficial differentiation in incentives. We identify and formalize two mechanisms through which this occurs: a smoothing channel, where uncertainty breaks up the inefficient bunching of behavior that would otherwise be caused by a known standard, and a projection channel, where individuals rationally form differentiated beliefs about what the standard requires based on their own characteristics. We show that, while uncertainty worsens incentives for mid-cost types, it improves them for more extreme types and can raise aggregate welfare depending on the population mix. We apply our analysis to shed new light on a range of fundamental issues in legal design, including the optimal degree of legal complexity, the choice between rules and standards, and the choice between “sanctions” and “prices.”

TMI? Why the Optimal Architecture of Disclosure Remains TBD

113 Michigan Law Review 1021 (2015)

This review essay engages with Ben-Shahar and Schneider's compelling critique of mandatory disclosure as a regulatory technique. While acknowledging that traditional disclosure approaches have largely failed due to a misunderstanding of psychology—people are decision averse and disclosures offer little useful simplification—the review argues that the book does not fully engage with the burgeoning behavioral literature on disclosure that advocates alternative approaches. The essay reframes the core thesis while exploring the limits of the book's critique and considering how improved disclosure architecture might address some of the identified failures.

Comment: The OIRA Model for Institutionalizing CBA of Financial Regulation

78 Law & Contemporary Problems 47 (2015)

This comment responds to articles by Professors Coates and Cox on cost-benefit analysis in financial regulation. It follows an important analytic distinction between what analytic framework and decision procedure regulators should apply in setting policy and what institutional framework of administrative decisionmaking will best bring about the application of that preferred analytic approach. The author endorses conceptual cost-benefit analysis as an analytic framework for financial regulation—standard economic analysis of policy in which the analyst specifies the problem the regulation aims to solve, identifies and measures costs and benefits of regulatory options, and chooses the option that best optimizes the tradeoff between costs and benefits.

How Behavioral Economics Trims Its Sails and Why

(with Richard Pildes), 127 Harvard Law Review 1593 (2014)

The preference of behavioral law and economics (BLE) for regulatory approaches that preserve "freedom of choice" has led to incomplete policy analysis and inefficient policies. BLE has been broadly regarded as among the most promising new developments in public policymaking theory and practice. As social science, BLE offers hope that better understanding of human behavior will provide a sounder foundation for policy design. As politics, BLE offers a possible political consensus built around minimalist forms of government action—"nudges"—that preserve freedom of choice. These two seductive dimensions of BLE are, however, in deep tension. Put simply, it would be surprising if the evidence documenting the failure of individual choice implied a turn toward regulatory tools that preserve individual choice. Developing BLE fully along its social-scientific dimension would reveal two categories of recurring limitations in BLE. First, BLE often artificially excludes traditional regulatory tools, such as direct mandates, from its analysis of policy options. However, BLE's preferred nudges are, in important cases, not likely to be effective—ironically, for reasons BLE itself identifies. BLE has also neglected the ways in which behavioral failures interact with traditional market failures and the implications of this interaction for policy design. A more complete framework generates policy recommendations beyond both nudges and neoclassical economic prescriptions. Second, BLE does not properly evaluate, at times, how its own regulatory tools actually function. Many of these seemingly choice-preserving tools are not nearly as light touch as advertised. The default rules so central to BLE are often better viewed as preserving the formality of choice while, for many individuals, functioning as effective mandates. The view that people can always rationally opt out has led policymakers to set these powerful defaults at the wrong levels, resulting in counterproductive policies. We illustrate the costs of BLE's commitment to freedom of choice by analyzing three of the most important areas for current policy: retirement savings, consumer credit, and environmental protection.

Optimal Agency Bias and Regulatory Review

(with Patrick Warren), 43 Journal of Legal Studies 95 (2014)

Why do bureaucratic principals appoint agents who hold different policy views from themselves? We posit an explanation based on the interplay between two types of agency costs: shirking on information production and policy bias. Principals employ biased agents because they shirk less. This creates an incentive for the principal to use review mechanisms that mitigate the resulting bias in the agents' decisions. The availability of such review mechanisms encourages principals to employ more extreme agents. We apply the theory to explain various features of the administrative state. In contrast to existing accounts, in our model the use by the president of ideological bureaucrats at regulatory agencies and centralized regulatory review are complements. The use of bias to mitigate shirking results in an amplification of the swings of regulatory policy and heightens the role of regulatory policy in partisan politics.

The Evolution of Property Rights: State Law or Informal Norms?

56 Journal of Law and Economics 555 (2013)

This paper investigates the factors that have shaped the evolution of property rights institutions. Using a regression discontinuity design, I show that the divergent state laws of Ghana and Côte d'Ivoire have had little effect on de facto property rights institutions. In contrast, the data show that these states' laws and policies have had large impacts on other economic outcomes. Furthermore, I show that part of the substantial within-country variation in property rights institutions is explained by economic factors. Areas that are more suitable for growing cocoa have a greater prevalence of land transfer rights. My findings highlight the importance of nonstate sources of norms and show that these norms do, to some extent, evolve to accommodate the changing needs of society.

The Economics of International Refugee Law

(with Michael Kremer, David Levine), 40 Journal of Legal Studies 367 (2011)

We model the evolution of international refugee law and analyze reform proposals. We show that the 1951 Convention Relating to the Status of Refugees can be understood as an agreement among states to supply the global public good of refugee protection but that the increase in economic migration has led states to shade on their obligations under the convention. Furthermore, one state shading on its obligations strengthens incentives for other states to shade, potentially creating multiple equilibria. Under the open-ended nonrefoulement norm of the convention, reforms that make a state less attractive for potential immigrants, such as taxes or north-to-south transfer systems, would create negative externalities for third countries. In contrast, reforms in which wealthy states pay poor states to resettle refugees from other poor states would create positive externalities on third countries. Subsidizing such transfers would be more efficient than current policies used to reduce the social costs caused by concentrations of refugees in certain southern host states.

BITs and Bargains: Strategic Aspects of Bilateral and Multilateral Regulation of Foreign Investment

(with Susan Rose-Ackerman), 27 International Review of Law and Economics 291 (2007)

Bilateral investment treaties (BITs) provide international standards for the protection of foreign investment. Andrew Guzman has argued that BITs represent a prisoner's dilemma for developing countries—they would have been better off operating under customary international law. We formalize and critique Guzman's claim and demonstrate that a prisoner's dilemma is not necessary to explain the developing countries' behavior. Instead, the optimal strategy for newly independent states may have been to reap a windfall gain by a temporary period of expropriation and then to use BITs to commit to respecting property rights to new foreign investments. Finally, we argue that a multilateral agreement on investment (MAI) is now unlikely because the widespread coverage of BITs has narrowed the achievable surplus of an MAI.