All posts by Eric Posner

FINANCIAL REGULATION

The perils of financial predictions

I’m reading a 2011 book called Guaranteed to Fail: Fannie Mae, Freddie Mac and the Debacle of Mortgage Finance by Viral V. Acharya, Matthew Richardson, Stijn van Nieuwerburgh, and Lawrence J. White. This is a serious book by reputable scholars. I’ve made it to p. 3, where they write:

[T]he chances are slim to none that either Fannie or Freddie will be able to pay back the funds [they received from the government]…. So where is the outrage?

And yet as we know, Fannie and Freddie have paid back the government (or, more precisely, the government has made money on its investment in preferred stock).

Here is the paradox or irony or whatever you want to call it. During the financial crisis, we learned that the CDOs and other mortgage-backed securities that everyone thought were safe were based on assumptions about housing prices and underwriting standards that turned out to be wrong. Their market value plunged as people stopped trading them. The government saved the day by lending widely so people could hold onto these securities until maturity or reduce their exposure to them.

The proper inference was “these securities are hard to value.” The actual, wrong response was “these securities are worthless [or close to worthless].” Of course, if the securities are hard to value, we don’t know whether they are worthless or not. And yet it seems that nearly everyone draw exactly the wrong lesson. People had as much unwarranted confidence in their valuations of the securities after the crisis as they did before; they simply changed what they thought the valuations were–from high to low. And they were wrong again.

MISC.

Has the Supreme Court become less ideological?

Or, maybe I should have asked: Have the Republicans on the court become less ideological?

Justice Same-Party Agreement, % Opposite-Party  Agreement, % Propensity to Same-Party Agreement
Roberts 74.5 82.3 0.91
Kennedy 73.8 84.8 0.87
Scalia 76.5 74.3 1.03
Alito 77.3 75.3 1.03
Thomas 73.5 62 1.19
Breyer 92.7 82.5 1.12
Ginsburg 91.3 75.2 1.21
Sotomayor 91.3 74 1.23
Kagan 90.7 77.3 1.17

The numbers in the second and third columns are averages derived from Scotusblog (scroll down to the bottom). The last column is the second column divided by the third, so >1 means greater agreement with co-partisans.

Roberts and Kennedy are more likely to agree with the Democrats than with the other Republicans. I don’t think this has happened before. Last year, Roberts agreed with his co-partisans 88.8% of the time, and his opposite-partisans 81% of the time. For Kennedy, it was 86.8% and 82.25%. The Democrats and Thomas follow the ideologically polarized pattern of prior years.

HUMAN RIGHTS

The human development index

The human development index (HDI) was developed in the wake of Amartya Sen’s critique of development policy that is oriented toward GDP growth. Sen argued that development policy should promote freedom as well. The authors of the HDI included various measures of freedom (or mostly: of human well-being) like political rights, literacy, and health. As the graph below shows, however, a policy of promoting GDP is not much different from a policy of promoting HDI, especially given how noisy both these measures are.hdi

Guest Post, LEGAL SCHOLARSHIP

Law Profs. with PhDs & Data Collection

A guest post by Adam Chilton:

UCLA law professor Lynn LoPucki recently posted an article examining 120 empirical papers that were published in 15 leading law reviews and the Journal of Empirical Legal Studies. LoPucki coded these articles to see who was writing them, and what kind of data they used. The paper’s primary finding is that articles in the dataset written by law professors without a PhD were more likely than those with a PhD to code original data instead of using existing dataset sources. From this fact, LoPucki concludes that there is a “reduction in coding resulting from the hiring of more J.D.-Ph.D.s” that is undesirable for the legal academy. 

I have two thoughts about this interesting finding. First, I don’t think that we can infer from LoPucki’s paper that law professors with PhDs actually code less data. The reason is that LoPucki’s units of analysis are papers and not professors. It could be the case that law professors with PhDs code new data for a lower percent of their empirical articles, but still collect new data for a much higher absolute number of papers. LoPucki’s claim could be true–and I don’t have data to suggest otherwise–but I don’t think that it’s demonstrated in his current paper.

Second, I’m not persuaded by the claim that the measure of a good empirical legal studies paper is whether it codes original data. To be fair, LoPucki’s argument is not that coding original data is necessarily important for all disciplines. Instead, his argument is that  coding original data is important for legal scholarship because it typically requires direct engagement with legal materials like cases or statutes.

I think that for all empirical papers–whether written by law professors or economics professors–the question of whether to collect original data or use existing data sources should depend entirely on what data are already available. For some topics it would be a waste of resources to reinvent the wheel, and for other topics collecting new data may be absolutely necessary. I think that an empirical legal paper is valuable if it credibly brings new evidence to an important topic, not if the dataset was coded specifically for the paper.

FINANCIAL REGULATION, MISC.

Martin Schmalz: How passive funds prevent competition

Guest post by Martin C. Schmalz, University of Michigan.

Last week, Nelson Peltz’s hedge fund Trian lost a proxy fight at DuPont. The outcome of the battle received much attention, among others because the “passive” investors Vanguard, BlackRock, and State Street were instrumental in making his bid fail – they voted against him. Commentators have ex-post rationalized the failure of the campaign with gaps in some of Peltz’s arguments, his personality, and other factors. Curiously, nobody seems to have taken a look at how Peltz’s and the “passive” funds’ economic incentives differed. This note takes a first look at those, and comes to rather interesting conclusions.

According to Trian’s presentation filed with the SEC, the primary goal of Peltz’s campaign was to help DuPont achieve “best in class revenue growth.” He points out that DuPont’s performance in recent years was satisfactory only because of a positive industry-wide trend, but not if measured relative to DuPont’s competitors. Note for later that the first peer mentioned for comparison in the presentation is Monsanto. A second point of critique concerned DuPont’s lack of aggressive investment in R&D and other measures to gain market share. Third, Trian criticizes DuPont’s CEO for selling a large fraction of her shares in DuPont under the tenure of the index funds, a move that weakened her incentives to make DuPont perform well as an individual firm and strengthen the firm’s relative competitive position. Fourth, Peltz criticizes that DuPont willingly violated a Monsanto patent, then chose to pay $750m more than required in a settlement, and entered a licensing agreement with Monsanto until 2023, effectively pre-committing future cash flows to the competitor. Peltz also criticizes DuPont for “paying competitors” for such licenses more generally.

Peltz’s arguments make perfect sense according to the conceived wisdom reflected in corporate finance textbooks, which assume that all shareholders are undiversified: Peltz’s motion for an increased use of relative performance evaluation, for steeper CEO incentives and against wealth transfers to competitors at the expense of DuPont’s shareholders – textbooks would consider all of these measures value-enhancing improvements of DuPont’s corporate governance. Also, Institutional Shareholder Services (ISS), a proxy advisory firm, supported Peltz’s campaign.

As we know since last week, these arguments left DuPont’s largest shareholders – the diversified investors Vanguard, BlackRock, and State Street – unimpressed. They voted against Peltz, leading to a rejection of his bid, and a multi-billion dollar drop in DuPont’s stock price (indicating the market also thought DuPont would have been more valuable with Peltz on the board). So why did the mutual funds not share Trian’s goals?

To answer that question, it is instructive to see who DuPont’s competitors are. A quick browse gives a first indication why Peltz considers Monsanto to be DuPont’s primary competitor:  Monsanto and DuPont are the two firms dominating the seeds market, and Monsanto is DuPont’s next-largest competitor in the fertilizer and pesticides market.  Conversely, these two markets generate almost all of Monsanto’s revenue.[1]

schmalz tables 1 and 2

Peltz believes competing harder would increase DuPont’s value. For example, DuPont could decrease prices in the seeds market, and thus increase its market share. The stock market, as indicated by the stock price reaction amid the news of Peltz’s failed bid, appears to agree. The lower market prices for seeds would also lead to greater output and ultimately lower product prices for consumers – for short, greater economic efficiency. However, it would hurt Monsanto’s shareholders if DuPont were to compete more aggressively: DuPont’s increase in market share would come at the expense of Monsanto’s. So who are Monsanto’s shareholders?

It turns out that the same “passive” funds that helped reject Peltz’s bid at DuPont are – in the same order – also the dominant shareholders of Monsanto. In fact, with the exception of Peltz’s Trian Fund, the two firms’ top shareholders are almost identical.

schmalz table 3

The “passive” funds have no reason to object against cash transfers from DuPont to Monsanto – it’s just a transfer from one pocket to the other. Of course, Peltz (and everyone else who has a sufficiently steep interest in DuPont’s value) should object. That is the first source of imperfectly aligned incentives between the passive funds and Trian.

The more important insight, however, is that the common shareholders of the two firms would suffer from increased competition. Because prices would be lower, so would be the combined revenue and profits of DuPont and Monsanto. That outcome is in strict discord with the economic interests of Vanguard, BlackRock, and State Street. That is the second – and socially important – source of disagreement between the economic interests of Trian and the mighty mutual funds.

Here is one last nugget. Guess which company among DuPont’s competitors experienced a major change in stock price while DuPont’s price dropped in response to the news that Peltz’s bid failed. From market close on Tuesday to opening on Thursday, Monsanto’s shares gained 3.5%.

It appears that a dispassionate look at different shareholders’ economic incentives supplies a rather simple rationale for why the passive funds did not themselves enforce relative performance evaluation, protest the weakening of DuPont’s CEO’s incentives, encourage more R&D and gains in market share, and so forth.[2] Doing so simply isn’t in their economic interest. Peltz’s campaign, by contrast, aimed at increasing DuPont’s value in isolation, by strengthening DuPont’s relative competitive position. Predictably, the mutual funds voted against him.[3]

Before we conclude, pay attention to the dog that didn’t bark: Peltz’s failed campaign sends a strong signal to activists with similar goals as those Peltz tried to advance. If not before, then now they know: the combination of the index funds’ economic interests and voting power makes it unlikely that a campaign aimed at tougher competition will pass the ballot – so it might not be worth it to target a firm with these goals in mind in the first place.[4] That is how common ownership by “passive” funds can cause anti-competitive outcomes. If we want lower product prices, and higher output and efficiency, then taking a close look at the power and industrial organization of the asset management industry might be a good place to start.

[1] I haven’t gotten around to finding data on DuPont’s other product markets, which is why the following analysis is limited in scope and the external validity of its conclusions.

[2] Of course, this analysis does not prove that the passive funds voted against Peltz because he wanted DuPont to outperform the peers held by the passive funds, or because he criticized the voluntary wealth transfers to Monsanto and the lack of steep CEO incentives. Yet, whatever the reasons why the passive investors voted against Peltz, be it their economic incentives or other considerations, it is undisputable that their vote did prevent a campaign aimed at tougher competition. They thus caused less competition, compared to what it otherwise would have been.

[3] This outcome was indeed predicted. In this paper, my coauthors José Azar, Isabel Tecu, and I wrote: “owners generally need to push their firms to aggressively compete, because managers will otherwise enjoy a “quiet life” with little competition and high margins. Only shareholders with undiversified portfolios have an incentive to engage to that effect, while only large shareholders have the clout to do so. However, the largest shareholders of most firms tend to have diversified portfolios and therefore reduced incentives to push for more competition, whereas smaller undiversified investors don’t have the power to change firm policy without the support of their larger peers.”

[4] Opportunities abound for activist campaigns that didn’t or will never happen: very many U.S. firms are commonly owned by a similar set of diversified mutual funds as those owning DuPont and Monsanto. Here are a few examples.

MISC.

Citizenship for sale

In Slate, I criticize the US citizenship-for-investment (effectively, citizenship-for-sale) program, while defending other countries that have dabbled with this approach.

I wasn’t able to find much research on the EB-5 visa program. It’s a good topic for someone to write about.

Guest Post, LEGAL SCHOLARSHIP

The Failure of Constitutional Torture Prohibitions

Torture ProhibitionsA guest post by Adam Chilton and Mila Versteeg:

As the graph above shows, about 84% of countries now have prohibitions against using torture enshrined within their constitutions. Given the recent revelations that even wealthy and democratic countries like the United States have engaged in torture, it’s worth asking whether these constitutional prohibitions have helped to actually reduce torture.

In a short article on the Washington Post’s Monkey Cage blog, we explain our recent research that finds that constitutional torture bans have not reduced torture. Although the available data on rates of torture around the world obviously isn’t perfect, a few widely used datasets have been developed. After analyzing these datasets, we’ve found that countries with torture prohibitions torture more than those without, and that rates of torture do not go down after torture prohibitions are adopted.

Although our Monkey Cage post relies on raw data to make our argument, in our academic article on the topic we use a variety of more sophisticated empirical methods. We specifically rely on a new method developed by the political scientist Yoanthan Lupu designed to address the endogeneity concern that plagues human rights research: decisions to adopt human rights protections are systematically related to human rights practices. Although Lupu uses this method to study human rights treaties, we use it to study constitutional rights. The basic idea is that we first estimate countries’ constitutional preferences using a technique known as ideal point estimation, and then match countries together based on those preferences and a range of other variables. We are then able to estimate the effect of torture prohibitions on torture rates.

When using this method, and a range of more conventional regression techniques, we do not find any evidence that constitutional torture prohibitions have reduced torture. Moreover, not only do the estimated effects of constitutional prohibitions never achieve statistical significance in the dozens of regression models we use in our paper, the estimated effects are consistently substantively small as well. Our findings thus suggest that if we want to reduce levels of torture around the world, we have to find a better way to do it than just enshrining torture prohibitions in constitutions. If you’d like to learn more about our research on the topic, our paper is available on SSRN.

MISC.

Why you should write for the New Rambler Review

The New Rambler Review takes its name from Samuel Johnson's The RamblerMany academics consider it a professional obligation to write reviews of new books in their field. The reviews are published in academic journals which are hidden behind firewalls, so that they can’t be read by the public. And because most academics don’t read journals in other disciplines, an interesting book with cross-disciplinary appeal can easily be overlooked.

This is a wasteful legacy from the dead-tree era, and the NRR aims to fix it. The NRR is accessible to everyone with a browser. More to the point, if you read a book and are curious what experts think about it, you can find an NRR review just by googling the book. Not only that, the review is likely to appear on the invaluable first page of the Google search results.

Take, for example, Michael Glennon’s new book, National Security and Double Government. This is a book that anyone might read. If you type “Glennon National Security Double Government” into Google, you’ll find the NRR review of it by Clifford Bob on the first page of the search results. You won’t find this review, which appeared in the academic journal Public Choice. Even if you do, you won’t be able to read it unless you belong to an academic institution with a site license or are willing to shell out $39.95 (!).

So if you see a book that you think the public should know about, would like to review it, and want people to be able to find and read your review, contact us.

FINANCIAL REGULATION

More on mutual funds and antitrust

Last week, Glen Weyl and I published a piece in Slate that argued that mutual funds and other institutional investors were cartelizing the airline industry, and very likely other industries as well. Our piece was based on an academic paper by Azar et al., which found evidence that a merger between two major institutional investors with large stakes in the airline industry caused ticket prices to rise. To remedy this problem, we proposed restrictions on mutual fund investment within industries. (No, we did not propose banning mutual funds.)

Mathew Klein at the Financial Times and Matt Levine at Bloomberg disagree. (Klein: a “wacky idea.” Levine: “I tweeted about Posner and Weyl’s article and the reactions were, I think it is fair to say, uniformly incredulous.”) Joshua Gans does agree, and provides an extremely lucid account of the underlying theory. A few responses:

  1. We don’t oppose all mutual funds, just those that cartelize industries. Mutual funds that buy shares of firms across industries, rather than within industries, get a pass. The gains from further diversification within industries after the benefits from diversification across industries are obtained, are tiny. Moreover, small funds can buy shares within industries without harming anyone. The key is balancing the gains from diversification and the costs of cartelization.
  1. As Piketty shows, most capital is owned by the wealthy, and is far more concentrated than labor income or consumption. Reducing the returns on capital would not harm middle-class owners of capital very much, and would be offset by the reduction in prices of goods and services they buy. In an ideal world, middle-class mutual fund investors would instruct the funds not to cartelize the industry at their own expense, but obviously they cannot do that. They rationally chase the highest returns, in the process causing harm to each other.
  1. While we proposed regulation of 401(k)s, this was not meant to be an exclusive remedy. The problem is cartelization; the most natural response is enforcement of antitrust law. But a starting point is removal of a tax subsidy that benefits mutual funds that try to cartelize industries.
  1. The decline of airline prices over time does not refute Azar’s argument. The prices are still higher than they would be if the market was less concentrated. But the airline industry is not the issue. That’s just where Azar and his coauthors looked for evidence. If they are right about airlines, then the problem is general to the economy. The real puzzle is: where are the antitrust authorities?
MISC.

Shaming is back!

Law professors of a certain age will remember that back in the 1990s, there was a debate about whether courts should impose shaming sanctions on offenders. This debate was caught up in larger discussions about the relationship between social norms, nonlegal sanctions of all sorts, and the law. But there was always an academic quality to this debate. It seemed at the time that shaming could not be an effective tool of social control in a huge, mobile, mostly anonymous society. So we all imagined shame and other social sanctions in confined settings: neighborhoods and communities, merchant and professional groups, and so on.

That was then. One Internet later, everything has changed. I discuss on Slate.

MISC.

The Most Good You Can Do

In Slate, I discuss Peter Singer’s new book, The Most Good You Can Do. I like Singer’s utilitarian outlook, and I like the way he follows its logic into all kinds of dark corners, though I like less his attempt to prettify it in order to make it seem appealing to ordinary people.

Despite offering a surprising paean to capitalism (see p. 50 if you don’t believe me), Singer doesn’t take institutions very seriously, which I think is a problem in much of his writing (above all, in One World). Institutions coordinate people’s behavior for the common good; the sort of uncoordinated giving through philanthropic organizations for the benefit of impoverished foreigners won’t work, at least not at a large enough scale to make a difference, or that is at any rate the lesson I take from the foreign aid literature. Foreign countries have their own cultures, institutions, practices, and values. Agency costs exist in charitable organizations just like in for-profit organizations. All of these things spell trouble for “effective altruism” if understood to be committed to searching out those with the highest marginal utility per dollar. That said, by all means give your dollars to GiveDirectly or the other charities recommended by GiveWell if you want to maximize aggregate well-being, conditional on not too many other people doing the same.

There is a tension in the book between Singer’s relentless utilitarianism and human psychology. If you take Singer-the-philosopher seriously, then basically anything you do kills someone in the developing world. X number of ice cream cones means so much money less for malaria nets that will save the lives of children in Africa. Here is a philosopher who finally takes opportunity costs seriously! Singer simultaneously thinks that you should forgo the ice cream cones and somehow absolves people who don’t go this far, recognizing that the psychological burden of effective altruism is immense if taken to the extreme. Everyone has limits, he admits.

It’s clear why he does. Singer is afraid to scare off people who are willing to donate 10 or 20 percent of their income by telling them that they are not acting ethically unless they donate 80 or 90 percent of it. Singer’s style of utilitarianism may be philosophically impeccable, but it is a loser when it comes to motivating people. He tries to get around this by saying that the 10-percenter is more ethical than a purely selfish person, so one can take comfort in that. But people really want to know whether they are behaving ethically or not–yes or no–not where they fall on a scale, and Singer can’t answer that question to their satisfaction.

INTERNATIONAL LAW

International Water Law: Egypt, Ethiopia, and the Nile

A guest post by Daniel Abebe:

To many people, water law might not sound like the most exciting area of international law but it is becoming an increasingly important issue. The dispute between China on one side, and Vietnam, Laos, Cambodia, and Thailand on the other, over the Mekong River affects access to water for millions of people in Southeast Asia. In more volatile parts of the world, Iraq, Syria, and Turkey have not agreed on dividing the Tigris and Euphrates Rivers, while the Jordan River is subject to dispute among various countries in the Middle East. Perhaps most prominently, Egypt, Ethiopia, Sudan, and other countries in the Nile River Basin, have failed to agree on the equitable division of the world’s longest river, the Nile. As populations grow and economic development demands greater access to water resources, these disputes will likely become more intractable.

But just a few days ago, the leaders of Egypt, Ethiopia, and Sudan signed an initial agreement in which they pledged to better share the Nile River’s waters and, according to Egyptian President Al-Sisi, realize “mutual gains for everyone and avoid damage to any party.” Although the key details have not been negotiated, the impetus for the agreement was Ethiopia’s decision to construct the Great Ethiopian Renaissance Dam on the Blue Nile, the Nile’s largest and most important tributary originating in Lake Tana, Ethiopia. In Egypt, Ethiopia, and the Nile, The Economics of International Water Law, I analyze the dispute, describing the complex legal, political, economic, and national security issues that have made reaching a comprehensive agreement on the Nile between Egypt and Ethiopia so difficult. The importance of the Nile to both countries is clear. For example, since the Great Ethiopian Renaissance Dam has the potential to reduce the Nile’s downstream water volume — and the Nile provides 96% of Egypt’s freshwater and the Nile Valley hosts 98% of Egypt’s 85 million people — Egypt had been vehemently opposed to its construction. Ethiopia, on the other hand, wants to exploit its water resources — Ethiopia provides over 85 percent of the Nile’s volume but utilizes less than 1 percent of the Blue Nile — to provide hydro-electric power to a growing population. Any final agreement would not only have to delineate a mutually agreeable division of the Nile’s waters, but also include mechanisms for implementation, monitoring, enforcement, and compensation for violations between two non-democracies with a long history of mistrust. In short, stay tuned. If you want to learn more about the dispute between Egypt and Ethiopia over the Nile or potential approaches to resolving it, the paper is available on ssrn.

Guest Post, INTERNATIONAL LAW

Visiting International Organizations & the Mechanisms of International Law

31382A guest post by Adam Chilton:

There are three pillars of international law: international human rights law, international humanitarian law (also know as the laws of war), and international economic law. Over the last week, I tagged along with a group of overachieving University of Chicago Law School students who decided to spend their spring break in Geneva visiting the international organizations most directly associated with each of these three branches of international law. When visiting these institutions, I was struck by how clearly each of their approaches to hosting visitors illustrates the mechanisms that scholars argue they use to change countries’ behavior.

The United Nations Human Rights Council (“HRC”) is a committee made up of 47 countries that tries to monitor the human rights practices of all countries that are members of the UN. The HRC meets in a large assembly room in the UN building in Geneva. The HRC’s room has seating areas for both the press and the public to watch their meetings, and webcasts all of the proceedings live. When we met with the HRC spokesman, he spoke about how social media engagement is one of the primary ways the Committee accomplishes its goals. The message was clear that HRC’s goal is to raise awareness of human rights abuses by engaging the public.

The International Committee of the Red Cross (“ICRC”) is the international organization that tries to monitor and promote compliance with International Humanitarian Law. Similar to the HRC, the ICRC headquarters in Geneva have public-facing spaces designed to make the work performed by the ICRC accessible to visitors. This includes a museum that documents the work of the ICRC and that outlines the major violations of the laws of war over the last century. The ICRC also runs courses for visitors on the basics of International Humanitarian Law. The ICRC’s goal is to clarify what is required of states during war, and to make the rules and violations well known.

The World Trade Organization (“WTO”) is an international organization that administers the international trading system. Unlike the other two organizations, the WTO does not offer daily tours or have an elaborate welcome center. Instead, visiting the WTO is a bit like visiting a law firm. You have to check in at a reception desk, and wait for an official to escort you into the building. We met with five WTO officials over two days. The officials were incredibly generous with their time, but I found it notable that not one discussed the importance of raising public awareness or how they utilize social media. Instead, the constant message was that the WTO system is increasingly weighed down by its own success. In short, too many countries are using the WTO dispute resolution system to adjudicate trade disputes and the organization is stretched thin trying to handle all of the cases.

For all three institutions, the way they engage the public reflects the mechanisms that scholars have agued that these bodies of law use to influence state behavior: international human rights law tries to raise awareness of abuses to create domestic political pressure for countries to improve their rights practices; international humanitarian law tries to clarify the obligations of states during war to create a common understanding of what practices are acceptable; and international economic law channels disputes into legal processes that are then enforced by reciprocal suspension of economic concessions.

MISC.

Debate about the right to be forgotten

You can watch a debate about the right to be forgotten between me and Paul Nemitz (pro) and Jonathan Zittrian and Andrew McLaughlin (con) here. Nemitz is a top EU privacy official with extraordinarily deep knowledge of privacy matters, while Zittrain is an internet law expert and McLaughlin is the CEO of Digg with extensive government and NGO experience.

I like to think our side landed some blows, but measured by audience reaction, our clock was thoroughly cleaned (is that the right expression?). Nemitz emphasized the political dangers of a world in which information about everyone is available on the Web, and hence available to the government, which can use it to monitor and control the public. I emphasized the personal costs in a world in which one’s identity is defined by search results that reflect a slip-up from decades ago.

I suspect that Nemitz’s argument made little headway with the New York audience because government repression based on surveillance is just not a part of historical memory in America, unlike in Europe. And my argument was probably too abstract (despite my uncharacteristic effort to pluck heartstrings). Although there are famous examples of people who lose jobs and suffer other harms because of some indiscretion that makes its way on the web, I think this worry seems remote to most people, at least so far, and there is a tendency to blame people for their indiscretions, however minor and whatever the consequences.

On the other side, McLaughlin and Zittrain warned of the dangers of censorship, and the risk that the right to be forgotten would be enforced in an arbitrary fashion. They also skilfully painted a dynamic and optimistic portrait of the Web as self-correcting; the harms that the right to be forgotten would address in blunderbuss fashion will eventually be addressed by the Web itself, as search engines and other institutions respond to public demand for more nuanced and fairer search results. Regulation at this point would short-circuit these developments.

The bottom line is that in America (unlike in Europe), even in the upper west side of New York, people trust corporations more than they trust the government.

Guest Post, INTERNATIONAL LAW

The Doctrinal Paradox & International Investment Law

A guest post by Adam Chilton: 

When multi-member courts have to decide cases that involve multiple connected issues, the outcome of the case can change based on how the court counts the votes. This well documented phenomenon is known as the Doctrinal Paradox. Although it’s possible to explain the paradox more formally, it can easily be explained with a simple example borrowed from the philosopher Philip Pettit.

Imagine that a three-judge panel has to decide liability in a torts case. To determine whether there is liability, imagine that the judges first have to decide whether the defendant caused the harm, and that they then have to decide whether the defendant had a duty of care. The judges’ votes on these two issues will then determine whether they think there is liability. Now imagine that the judges vote in the following way:

Issue 1:

Cause of Harm?

Issue 2:

Duty of Care?

 Outcome:

Liable?
Judge A

Yes

 Yes

Yes
Judge B

Yes

 No

No
Judge C

No

 Yes

No

Outcome

2-1

2-1

1-2

In this case, there are two votes in favor of each sub-issue, but only one judge that thinks the defendant should be found liable. If the court counts the votes issue by issue, the defendant would be liable (this is known as “issue-based voting”). If the court instead goes with the overall votes of the judges, the defendant would not be liable (this is known as “outcome-based voting”). In these scenarios, how the case is resolved is entirely dependent on which aggregation method the court uses to count the votes.

A few years ago, Dustin Tingley and I wrote a paper explaining that the conditions for the doctrinal paradox are increasingly present in international adjudication generally, and that this problem is likely to arise during international investment arbitration specifically. Although we were pretty confident that this was an issue that investment arbitrators would eventually have to resolve, we weren’t sure which aggregation rule would prevail.

Dustin and I were just notified that a doctrinal paradox has recently occurred in an international investment arbitration, and that our analysis was brought up in the proceedings. In Alapli Elektrik B.V. v. Republic of Turkey, the arbitrators had to decide whether they had jurisdiction to hear the case. The facts of the dispute are complicated, but essentially there were multiple arguments made by the defendant for why the panel did not have jurisdiction to resolve the case. One of the arbitrators disagreed with every one of the defendant’s jurisdiction arguments, and thus thought that the panel had jurisdiction. The other two arbitrators concluded that the panel did not have jurisdiction to hear the case, but they reached that conclusion for different reasons. Given this distribution of votes, issue-based voting would result in a finding that the panel had jurisdiction, but outcome-based voting would result in a finding against jurisdiction.

Alapli Elektrik B.V. v. Republic of Turkey demonstrates that the choice of aggregation rule can change the outcome of international adjudications.  Ultimately, the panel elected to go with outcome-based voting (a decision that was affirmed during an annulment proceeding), but this isn’t binding on all future international courts or even investment arbitrations. There are principled reasons for selecting either aggregation rule, and it might be worth the time of scholars to debate which method is most appropriate for international adjudications. If you want to learn more, our paper is on SSRN and the annulment decision is publicly available here.

HUMAN RIGHTS, INTERNATIONAL LAW, LEGAL SCHOLARSHIP

The Influence of History on Human Rights

Screen Shot 2015-03-03 at 5.43.44 PM

A joint post by Adam Chilton & Eric Posner:

In a new working paper–The Influence of History on States’ Compliance with Human Rights Obligations—we argue that scholars studying human rights could learn a lot from development economics.

There are considerable differences in countries’ levels of respect for human rights. Human rights scholars trying to explain these differences have focused on current variables. These current variables include things like whether countries have ratified international agreements or included specific protections in their constitutions.

There are also considerable differences in countries’ levels of wealth. Development economists trying to explain these differences have focused on the influence of history. For example, development economists have examined the influence of geographic factors, technological adoption hundreds of years ago, and the development of high-quality institutions centuries ago on countries’ current GDP.

If the legacy of history is a powerful predictor of economic differences between countries, it follows that history should explain the differences in countries’ respect for human rights. The graphs above illustrate this point. The graph on the left plots countries based on their latitude and GDP Per Capita in 2010. As the graph clearly shows, there is a strong,  positive relationship between these two variables: countries further from the equator are wealthier. The graph on the right plots countries based on the number of years since they adopted women’s suffrage and their current levels of women’s economic rights (this data is from the widely used CIRI human rights dataset). Once again, there is a strong, positive relationship: the same countries that respected women’s rights a hundred years ago respect women’s rights today.

In our paper, we develop this argument by testing the relationship between historical variables used in the development literature and current human rights practices. The results provides evidence suggesting that a number of the variables from development economics are powerful predictors of respect for human rights. If you’d like to learn more about our argument, method, or results, the paper is now available on SSRN.