Case Lounge
(room 701)
Jerome Greene Hall

The Antitrust of Reputation Mechanisms:
Institutional Efficiencies
and Concerted Refusals to Deal

Abstract:
An agreement among competitors to refuse to deal with another party is traditionally per se illegal under the antitrust laws. But coordinated refusals to deal are often necessary to punish wrongdoers, and thus to deter undesirable behavior, that state-sponsored courts cannot reach. When viewed as a mechanism to govern transactions and induce socially desirable cooperative behavior, coordinated refusals to deal can sustain valuable reputation mechanisms. This paper employs institutional economics to understand the role of coordinated refusals to deal in merchant circles and to evaluate the economic desirability of permitting such coordinated actions among competitors. It concludes that if the objective of antitrust law is to promote economic welfare, then per se treatment--or any heightened presumption of illegality--of reputation mechanisms with coordinated punishments is misplaced.

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Case Lounge
(room 701)
Jerome Greene Hall

How to Repair Unconscionable Contracts

Abstract:
Several doctrines of contract law allow courts to strike down excessively one-sided terms. A large literature explored which terms should be viewed as excessive, but a related question is often ignored--what provision should replace the vacated excessive term? This paper begins by suggesting that there are three competing criteria for a replacement provision: (1) the most reasonable term; (2) a punitive term, strongly unfavorable to the overreaching party; and (3) the maximally tolerable term. The paper explores in depth the third criterion--the maximally tolerable term--under which the excessive term is reduced merely to the highest level that the law considers tolerable. This solution preserves the original bargain to maximal permissible extent, and yet brings it within the tolerable range. The paper demonstrates that this criterion, which received no prior scholarly notice, is quite prevalent in legal doctrine, and that its adoption is based on powerful conceptual and normative underpinnings.

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Room 107
Jerome Greene Hall
 

The Public Utility Pyramids

Abstract:
In the 1920s and 1930s, many public utilities in the United States were controlled by holding companies organized in pyramid form. The holding companies' critics claimed that they extracted wealth from their subsidiaries' other shareholders. Other commentators argued that holding companies increased the value of subsidiaries by reducing their financing costs. I examine the effects of the Public Utility Holding Company Act of 1935 (HCA), which outlawed pyramid structures. The value of both top holding companies and their subsidiaries fall (rise) around the time of key legislative events suggesting a higher (lower) likelihood that the HCA would be enacted, supporting the hypothesis that holding companies added value. I also find that the valuation effects are most pronounced for financially distressed companies, suggesting that investors expected the HCA to force liquidations that would destroy option value.

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Case Lounge
(room 701)
Jerome Greene Hall

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Case Lounge
(room 701)
Jerome Greene Hall

Marco Ottaviani (Kellogg/Northwestern):

(Mis)selling Through Agents
(with Roman Inderst)

Abstract:
This paper studies the implications of the inherent conflict between two tasks performed by sales agents: prospecting for customers and advising on the suitability of the product sold. When structuring their salesforce compensation, firms trade off the expected losses resulting from "misselling" with the agency costs of providing marketing incentives. We characterize how the equilibrium amount of misselling and the scope for policy intervention depend on a number of features of the identified agency problem, such as a firm's internal organization of the sales process, the transparency of its commission structure, and the steepness of its agents' sales incentives.

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Case Lounge
(room 701)
Jerome Greene Hall

Efraim Benmelech (Harvard):

Vintage Capital and Creditor Protection
(with Nittai Bergman)

Abstract:
We provide novel evidence linking the level of creditor protection provided by law to the degree of usage of technologically older, vintage capital in the airline industry. Using a panel of aircraftlevel data around the world, we find that better creditor rights are associated with both aircraft of a younger vintage and newer technology as well as firms with larger aircraft fleets. Moreover, we find that more profitable airlines, airlines with lower leverage ratios, and airlines with less debt overhang are less sensitive to prevailing creditor rights in their country. We propose that by mitigating financial shortfalls, enhanced legal protection of creditors facilitates the ability of firms to make large capital investments, adapt advanced technologies and foster productivity.

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Room 107
Jerome Greene Hall

Information Production in
Financial Markets
(with Zhaohui Chen)

Abstract:
Information-producing agents can opt to produce from the sell-side or the buy-side of a financial market. In the former case, they act as intermediaries who can only sell their information to other market participants. In the latter capacity they can trade on their own private information or that acquired from an intermediary. Intermediaries generate a positive externality because they cannot enforce strong property rights over the information they produce for sale. As a consequence, financial market prices are more informative in the presence of sell-side information production. We examine conditions under which the sell-side externality is sustainable without an external subsidy.

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