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Vicarious Liability for Bad Corporate Governance: Are We Wrong about 10b-5?

I formulate a rational expectations signaling model of vicarious liability for securities fraud, particularly the much criticized "fraud-on-the-market" private class action arising under Rule 10b-5. I show that fraudulent misreporting by managers occurs in the absence of managerial moral hazard—that is, where managers simply maximize shareholder payoffs—and that vicarious liability can serve as an appropriate deterrent, creating separating equilibrium. I then show that the particular remedy under Rule 10b-5 can perfectly deter fraud and perfectly compensate purchasers, and that Rule 10b-5 class actions may function better than critics claim.


Church and State: An Economic Analysis

What purpose is served by a government’s protection of religious liberty? Many have been suggested, the most prominent of which center on the protection of freedom of belief and expression. However, since every regulation potentially interferes with religious freedom, it is useful to consider more concrete purposes that could suggest limits on the degree to which religious liberty should be protected. This article focuses on the concrete economic consequences of state regulation of religion. We examine the effects of state regulation on corruption, economic growth, and inequality. The results suggest that laws and practices burdening religion enhance corruption. Laws burdening religion reduce economic growth and are positively associated with inequality.


A New Capital Regulation for Large Financial Institutions

We design a new capital requirement for large financial institutions (LFIs) that are "too big to fail." Our mechanism mimics the operation of margin accounts. To ensure LFIs do not default on systemically relevant obligations, we require that they maintain a cushion of equity and junior long-term debt sufficiently great that the credit default swap (CDS) price on the long-term debt stays below a threshold level. If the CDS price moves above the threshold, either LFIs issue equity to bring it down or the regulator intervenes. This mechanism ensures that LFIs are always solvent, while preserving some of the benefits of debt.


The Myths and Realities of Correctional Severity: Evidence from the National Corrections Reporting Program on Sentencing Practices

The forces driving U.S. prison growth are poorly understood. This article examines one factor that has received insufficient attention: changes in time served. It demonstrates that time served has not risen dramatically in recent years, even declining in some jurisdictions. It also shows that time served is fairly short: median release times are approximately one to two years. Thus, admissions practices, not longer sentences, appear to drive prison growth. This article also examines whether time served varies across different types of inmates. Young, Hispanic, and violent offenders appear to serve longer sentences; race and sex appear to be of minor importance.


Retail Gasoline Price Ceilings and Regulatory Capture: Evidence from Canada

We evaluate the efficacy of price ceiling legislation by employing weekly data on retail gasoline prices for eight cities in Eastern Canada between 1999 and 2007. The use of these data allows us to pool "treatment" cities in the Atlantic provinces with "control" cities in Ontario and Quebec. Ordinary least squares and instrumental variables estimates demonstrate that the enactment of such regulation is significantly correlated with higher prices. A potential explanation for these results is that price ceilings act as "focal points" enabling firms to set higher prices, thus suggesting the possibility of regulatory capture.


The Impact of Right-to-Carry Laws and the NRC Report: Lessons for the Empirical Evaluation of Law and Policy

For over a decade, there has been a spirited academic debate over the impact on crime of laws that grant citizens the presumptive right to carry concealed handguns in public—so-called right-to-carry (RTC) laws. In 2005, the National Research Council (NRC) offered a critical evaluation of the "more guns, less crime" hypothesis using county-level crime data for the period 1977–2000. Seventeen of the eighteen NRC panel members essentially concluded that the existing research was inadequate to conclude that RTC laws increased or decreased crime. The final member of the panel, though, concluded that the NRC’s panel data regressions supported the conclusion that RTC laws decreased murder. We evaluate the NRC evidence and show that, unfortunately, the regression estimates presented in the report appear to be incorrect. We improve and expand on the report’s county data analysis by analyzing an additional six years of county data as well as state panel data for the period 1977–2006. While we have considerable sympathy with the NRC’s majority view about the difficulty of drawing conclusions from simple panel data models, we disagree with the NRC report’s judgment that cluster adjustments to correct for serial correlation are not needed. Our randomization tests show that without such adjustments, the Type 1 error soars to 40–70%. In addition, the conclusion of the dissenting panel member that RTC laws reduce murder has no statistical support. Finally, our article highlights some important questions to consider when using panel data methods to resolve questions of law and policy effectiveness. Although we agree with the NRC’s cautious conclusion regarding the effects of RTC laws, we buttress this conclusion by showing how sensitive the estimated impact of RTC laws is to different data periods, the use of state versus county data, particular specifications, and the decision to control for state trends. Overall, the most consistent, albeit not uniform, finding to emerge from both the state and the county panel data models conducted over the entire 1977–2006 period with and without state trends and using three different models is that aggravated assault rises when RTC laws are adopted. For every other crime category, there is little or no indication of any consistent RTC impact on crime. It will be worth exploring whether other methodological approaches and/or additional years of data will confirm the results of this panel data analysis.


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