Copyright (c) 2010 All rights reserved. http://works.bepress.com/abraham_wickelgren Recent documents in Abraham L. Wickelgren en-us Fri, 27 Aug 2010 01:31:40 PDT 3600 http://works.bepress.com/abraham_wickelgren/23 http://works.bepress.com/abraham_wickelgren/23 Wed, 25 Aug 2010 14:24:27 PDT It is well-known that a monopolist cannot commit to offer a high quality contract to a consumer reading costs are postive. This paper shows that this also holds in a competitive environment with consumer heterogeneity if the contract space is unrestricted. If firms can offer standardized contracts from a finite set, however, each with a standardized name, this paper shows that, when reading costs are not too large, there exists an equilibrium in which firms offer the most efficient contracts from the set of named contracts and consumers purchase the most efficient contracts offered without incurring any reading costs. Abraham L. Wickelgren Contract Theory http://works.bepress.com/abraham_wickelgren/22 http://works.bepress.com/abraham_wickelgren/22 Thu, 04 Feb 2010 10:21:20 PST We introduce discovery into a model of settlement and negative expected value (NEV) suits under asymmetric information. The option to conduct discovery has several important effects. First, because discovery is cheaper than litigation, it reduces the defendant's incentive to settle under asymmetric information. Second, discovery must be credible. Because discovery is more valuable the greater the uncertainty it resolves, this introduces a credibility constraint on pre-discovery settlement offers. This can further reduce the probability and size of a defendant's pre-discovery settlement offer. Lastly, discovery reduces the ability of NEV plaintiffs to use asymmetric information to extract significant settlements from defendants. Abraham L. Wickelgren Settlement http://works.bepress.com/abraham_wickelgren/21 http://works.bepress.com/abraham_wickelgren/21 Thu, 04 Feb 2010 10:10:45 PST We consider loyalty discounts whereby the seller promises to give buyers who commit to buy from it a lower price than the seller gives to uncommitted buyers. We show that an incumbent seller can use loyalty discounts to soften price competition between itself and a rival, which raises market prices to all buyers. Each individual buyer’s agreement to a loyalty discount externalizes most of the harm of that individual agreement onto all the other buyers. The resulting externality among buyers makes it possible for an incumbent to induce buyers to sign these contracts even if they reduce buyer and total welfare. Thus, if the entrant cost advantage is not too large, we prove that with a sufficient number of buyers, there does not exist any equilibrium in which at least some buyers do not sign loyalty discount contracts, and there exists an equilibrium in which all buyers sign and the rival is foreclosed from entry. As a result, with a sufficient number of buyers, an incumbent can use loyalty discounts to increase its profit and decrease both buyer and total welfare. Further, the necessary number of buyers can be as few as three. These effects occur even in the absence of economies of scale in production and even if the buyers are not intermediaries who compete with each other in a downstream market. Einer Elhauge Antitrust and Industrial Organization http://works.bepress.com/abraham_wickelgren/20 http://works.bepress.com/abraham_wickelgren/20 Tue, 08 Jul 2008 12:41:28 PDT We revisit Lucian Bebchuk’s (1996) claim that plaintiff’s can use the sequential nature of litigation to extract a positive settlement from a negative expected value suit. We make three claims. First, this result is heavily dependent on the specific bargaining game he uses. Second, in an alternating offer bargaining game, the outside option principle demonstrates that this cost sinking strategy will not allow a negative expected value plaintiff to extract a positive settlement offer. Third, this cost sinking strategy, however, can be effective for a defendant using a negative expected value defense. Warren F. Schwartz Settlement http://works.bepress.com/abraham_wickelgren/19 http://works.bepress.com/abraham_wickelgren/19 Tue, 08 Jul 2008 12:35:46 PDT The belief that it is better for cases to settle than go to trial is widespread, but the arguments in favor of settlement have typically overlooked how settlement affects one of the most important functions of the legal system: deterring undesirable behavior that gives rise to lawsuits. This essay argues that settlement can impair the ability of the legal system to deter harmful behavior selectively without chilling desirable behavior. Where it exists, this effect is a fundamental property of settlement in that there is no way to change other legal rules to eliminate it. Because settlement also has important benefits, such as the reducing legal costs and reducing uncertainty, this essay does not argue for any across the board prohibition of settlement. Rather, it suggests that judges should be more circumspect about encouraging settlements and that there may even be situations where some restrictions on settlement are warranted. Ezra Friedman Settlement http://works.bepress.com/abraham_wickelgren/18 http://works.bepress.com/abraham_wickelgren/18 Tue, 08 Jul 2008 12:29:28 PDT The Fifth Amendment guarantees criminal defendants the right to silence, blocking the court from drawing adverse inferences from the defendant's silence. This paper investigates the conditions under which extending such protection to civil defendants might increase (or decrease) social welfare. If discovery is imperfect, then defendants that acquire information about the dangerousness of their actions may hide this evidence at trial if it is bad. This tends to make the private benefit from acquiring such information exceed the social benefit. Furthermore, the private benefit from acquiring this information is greater when the court will infer the information is bad if the defendant does not present it. Thus, there are situations in which a right to silence may be necessary to prevent a defendant from acquiring information for which the social costs exceed the social benefit. On the other hand, if it is hard to hide damaging information, and the release of damaging information tends to induce lawsuits, then a right to silence may dampen already insufficient incentives to acquire information. Abraham L. Wickelgren Other Law and Economics http://works.bepress.com/abraham_wickelgren/17 http://works.bepress.com/abraham_wickelgren/17 Wed, 03 Oct 2007 12:16:17 PDT Contracts that involve the government differ from contracts between two private parties in that the identity of one of the parties, the government, is subject to change. Given that the incumbent government knows that it might not be in power when the contract is completed, it may have an incentive to structure the contract to make it more difficult for a new government to renegotiate it. I show that traditional damage measures used in contracts between two private parties exacerbate this problem. The reliance damage measure induces the incumbent government to enlarge projects beyond the socially optimal level when it fears that a new government will want to cut it back. Expectation damages suffer from the same defect, though to a lesser extent. Abraham L. Wickelgren Contract Theory http://works.bepress.com/abraham_wickelgren/16 http://works.bepress.com/abraham_wickelgren/16 Wed, 03 Oct 2007 12:13:01 PDT The criminal punishment literature has focused on justifying non-maximal punishments and the use of non-monetary sanctions. It has not addressed why imprisonment, rather than cheaper forms of corporal punishment, should be the dominant type of non-monetary sanctions. David Friedman (1999) recently hypothesized that, because convicts lack political influence, it is desirable to make punishment more costly than necessary to prevent policy makers from excessively punishing convicts. This paper explicitly models this hypothesis and uses simulations to determine under what circumstances this hypothesis justifies using imprisonment rather than cheaper non-monetary sanctions. Abraham L. Wickelgren Criminal Law and Economics http://works.bepress.com/abraham_wickelgren/15 http://works.bepress.com/abraham_wickelgren/15 Wed, 03 Oct 2007 12:05:41 PDT Critical loss analysis is often used to argue that firms with large margins have more to lose from a reduction in sales and hence are less likely to increase prices. This argument ignores the implication of economic theory that profit-maximizing competitors that do not coordinate their pricing only have large margins if their customers are not very price sensitive. We explore the implications of critical loss analysis using an internally consistent model of oligopoly. We show that for a given degree of substitutability between the merging firms’ products, firms with larger pre-merger margins will raise prices more than firms with smaller margins. This reinforces the traditional view that mergers are more likely to harm consumers when the merging firms have greater market power, as measured by their margins. We also derive internally consistent formulas for evaluating the profitability of price increases when defining markets and evaluating unilateral competitive effects. Daniel P. O'Brien Antitrust and Industrial Organization http://works.bepress.com/abraham_wickelgren/14 http://works.bepress.com/abraham_wickelgren/14 Wed, 03 Oct 2007 11:58:49 PDT Daniel P. O'Brien Antitrust and Industrial Organization http://works.bepress.com/abraham_wickelgren/13 http://works.bepress.com/abraham_wickelgren/13 Wed, 03 Oct 2007 11:54:56 PDT I analyze the innovation incentives under monopoly and duopoly provision of horizontally differentiated products purchased via bilateral negotiations, integrating the market structure and innovation literature with the holdup literature. I show that competition can improve local incentives for non-contractible investment. Because innovation levels are generally strategic substitutes, however, there can be multiple duopoly equilibria. In some circumstances, monopoly can provide a coordination device that can lead to greater expected welfare despite inferior local innovation incentives. The conditions for this to be the case, however, are quite restrictive. Abraham L. Wickelgren Antitrust and Industrial Organization http://works.bepress.com/abraham_wickelgren/12 http://works.bepress.com/abraham_wickelgren/12 Wed, 03 Oct 2007 11:51:12 PDT Polinsky and Rubinfeld (2003) propose a novel system for eliminating the conflict of interest between lawyers and clients over how hard the lawyer should work on a given case. In their analysis of the system, however, Polinsky and Rubinfeld implicitly assume that the lawyer's marginal cost of effort is common knowledge. This comment shows that, when that assumption is relaxed, while their scheme does reduce the agency problem relative to the standard contingency fee arrangement, it no longer eliminates it. Abraham L. Wickelgren Other Law and Economics http://works.bepress.com/abraham_wickelgren/11 http://works.bepress.com/abraham_wickelgren/11 Wed, 03 Oct 2007 11:47:12 PDT One of the most compelling reasons against affirmative action is the principle of color blindness, that is, the idea that race is an irrelevant characteristic that should not affect higher education admissions or hiring decisions. Despite the intuitive appeal of color blindness, this paper shows that adherence to this principle impedes economic efficiency when there has been past discrimination based on race. Past discrimination creates inefficiencies in the economy that persist across generations. Because of this persistence, race remains a relevant characteristic for firms and universities looking to hire or admit the best candidates. Rather than color-blindness, affirmative action is necessary to reduce or eliminate these inefficiencies. This is true even if the firm or university can observe the economic status of the applicant. Thus, affirmative action based on economic disadvantage does not eliminate the need for affirmative action based on race, even if the only concern is economic efficiency. Abraham L. Wickelgren Other Law and Economics http://works.bepress.com/abraham_wickelgren/10 http://works.bepress.com/abraham_wickelgren/10 Wed, 03 Oct 2007 11:41:29 PDT Most analysis of market power assumes that managers are perfect agents for shareholders. This paper relaxes that assumption. When managers of a multi-product firm exert unobservable effort to improve product quality, there is a trade-off between providing adequate effort incentives and ensuring sufficient price-coordination between the product divisions. This makes some intra-firm price competition optimal, explaining why many multi-product firms allow for competition between divisions. When there are effort spillovers, the optimal amount of price competition can be as great as when the products are under separate ownership. Even with some profit-sharing, intra-firm price competition can reduce quality-adjusted price, which has important implications for antitrust policy. Abraham L. Wickelgren Antitrust and Industrial Organization http://works.bepress.com/abraham_wickelgren/9 http://works.bepress.com/abraham_wickelgren/9 Wed, 03 Oct 2007 10:18:11 PDT Recent analyses of entry deterrence strategies have required an incumbent’s post-entry output or pricing strategy to be profit maximizing. However, most papers have continued to assume that either an incumbent can commit not to exit after entry or that exit is never optimal. When there are avoidable fixed costs of operating in any period, however, exit can be the optimal strategy. In this situation, entry deterrence strategies operate very differently than when exit is never optimal. In fact, the possibility of exit can make some, previously effective, strategies completely ineffective while improving the effectiveness of others. Abraham L. Wickelgren Antitrust and Industrial Organization http://works.bepress.com/abraham_wickelgren/8 http://works.bepress.com/abraham_wickelgren/8 Wed, 03 Oct 2007 10:12:20 PDT The prevailing view in the law and economics literature is that preventing firms and consumers from contracting out of mandatory liability rules is optimal only if consumers are irrational or misperceive the risks of the products they buy. In this paper, I show that even if consumers do correctly judge a product's risk, if they cannot directly observe the safety characteristics of that product, then allowing firms and consumers to choose their own liability rules cannot lead firms to make efficient investments in product safety (unless the efficient level of investment is zero). Because the legal system is costly, consumers always have an incentive to waive liability in exchange for a lower price after safety investments are sunk. If they do so, however, firms will anticipate this, thereby undermining there incentive to invest in safety. Mandatory product liability provides a mechanism for consumers and firms to commit not waive liability. Abraham L. Wickelgren Contract Theory http://works.bepress.com/abraham_wickelgren/7 http://works.bepress.com/abraham_wickelgren/7 Wed, 03 Oct 2007 10:06:47 PDT We consider a model of crime with rational Bayesian Jurors. We find that if jurors are not perfectly informed, even when there is no limit to the size of the punishment that can be imposed, it is not possible to deter all crime. There is a finite lower bound on the crime rate which results from the difficulties in achieving a conviction with imperfect evidence and very low crime rates. Crime can not be reduced below this rate by increasing the penalty, but the lower bound can be decreased by improving the quality of evidence presented to jurors, or by increasing the threshold of evidence necessary for prosecution. Ezra Friedman Criminal Law and Economics http://works.bepress.com/abraham_wickelgren/6 http://works.bepress.com/abraham_wickelgren/6 Wed, 03 Oct 2007 10:03:33 PDT In a recent paper, Lyon and Rasmusen (2004) argue that buyer-option contracts are more effective at solving the hold-up problem than has been previously recognized. This paper examines the robustness of that claim to changes in the bargaining game they analyze and to changes in the nature of the trade between the buyer and seller. I find that the possibility of renegotiation in a model of cooperative investment (Che and Hausch 1999) does generate a hold-up problem if the players discount the future and the bargaining game is sufficiently long. This change in the bargaining game does not resurrect the hold-up problem in the basic product complexity model (of Hart and Moore 1999). However, if the good to be traded must be supplied continually rather than only one time, then the hold-up problem re-emerges (even with buyer-option contracts) for some parameter values. Abraham L. Wickelgren Contract Theory http://works.bepress.com/abraham_wickelgren/5 http://works.bepress.com/abraham_wickelgren/5 Wed, 03 Oct 2007 09:44:26 PDT When the government bargains with a private firm, the firm cares about only its own profits, but the firm's profits may also enter into the government's utility function. As a result, the government will not bargain as aggressively for a low price. This can lead the government to "over pay" for quality. In contrast to the standard holdup problem, this reverse-holdup problem can give the firm an incentive to overinvest in non-contractible quality. The paper also discusses some examples where the reverse-holdup problem may explain excessive quality in government procurement. Abraham L. Wickelgren Contract Theory http://works.bepress.com/abraham_wickelgren/4 http://works.bepress.com/abraham_wickelgren/4 Wed, 03 Oct 2007 09:35:43 PDT The Coase Theorem suggests that married couples will divorce if and only if doing so increases their joint surplus, regardless of the legal rules governing divorce. This does not mean, however, that divorce laws only affect the distribution of rents. Because the distribution of rents affects each spouse's incentives for non-contractible investments, divorce laws can affect the joint welfare of the couple. This paper analyzes the effects of the consent divorce regime and the unilateral divorce regime on incentives for selfish and cooperative marital investments. Using these results, the paper demonstrates how endogenous choice of marriage with non-contractible investments can explain some recent empirical results concerning the effects of the shift from consent divorce to unilateral divorce. Abraham L. Wickelgren Family Law and Economics