Black Metropolis Research Consortium
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Borders and Boundaries in Markets: A Sociocognitive Approach for Market Definition and Implications for Antitrust
Full text linkCategorical distinctions are foundational to firm competition and regulation. Yet, market categories are notoriously difficult to define. The question of how to delineate markets is well-worn in the antitrust literature but is now the focus of a growing sociocognitive literature in strategy and organizational sociology.1 Historically, there has been little cross-pollination between these research areas. More integration, however, may be increasingly important in modern markets, where change is rapid, new technologies are key differentiators in many traditional industries, and platform competition is on the rise. In this paper, I introduce recent theoretical and empirical advances in sociocognitive research on categories in markets. I describe a theoretical model that incorporates the probabilistic nature of how people categorize, ambiguity in category boundaries, and that multiple audiences are relevant in most markets. Empirically, researchers employ a range of approaches to represent these aspects of market definition, from qualitative studies, to surveys, to computational approaches that leverage recent advances in machine learning applied to large corpora of text. I discuss key implications from this theoretical model and how they might inform market definition in antitrust
The Dysfunctional “Functional Equivalent” Standard: Regulations of Groundwater Discharges Since County of Maui v. Hawaii Wildlife Fund
Full text linkThe distinction between “groundwater” and “navigable waters” has long created legal disputes. The most recent Supreme Court decision to grapple with the boundary between groundwater and navigable waters is County of Maui v. Hawaii Wildlife Fund. Section 301(a) of the Clean Water Act (CWA) prohibits the discharge of any pollutant into navigable waters without a National Pollutant Discharge Elimination System (NPDES) permit. The question in County of Maui is whether the CWA applies to pollutants that travel from a point source through groundwater, before entering navigable waters. The Supreme Court held that the CWA requires a permit when the discharge is the “functional equivalent” of a direct discharge. However, the Court did not define “functional equivalent” and instead provided a list of seven factors for lower courts to evaluate on a case-by-case basis.
This Comment outlines lower courts’ applications of the functional equivalent standard and argues that the functional equivalent standard is inadministrable. Lower courts, endowed with too much discretion, are choosing to apply the functional equivalent standard as if it were a bright-line rule, in ways that are inconsistent and misaligned with the goal of the CWA: protecting our nation’s waters. This misalignment stems from the inconvenient fact that groundwater is hard to trace, and courts are not equipped with the expertise to track water particles through the hydrological system.
This Comment proposes that the functional equivalent standard be replaced with a model based on courts’ interpretations of the Federal Power Act (FPA) and Natural Gas Act (NGA). The FPA and the NGA provide models for how to regulate electricity transmission and natural gas pipelines, respectively, even though electrons and gas particles are hard to track and may cross state lines, much like groundwater. In both cases the default presumption is that the Federal Energy Regulatory Commission (FERC) retains legal jurisdiction to regulate electricity transmission and natural gas pipelines. Our treatment of water is anomalous— the default presumption is that the CWA does not apply to indirect discharges into groundwater. The functional equivalent standard should be replaced with a bright-line rule: all discharges into groundwater require an NPDES permit. This approach to groundwater discharges would provide clarity and stability, which are both essential for the success of the CWA
Insider Abstention and Rule 10b5-1 Plans
Full text linkCompany insiders will typically be in possession of material non-public information (MNPI) about their companies. In order to allow insiders the opportunity to trade, the SEC adopted Rule 10b5-1, which provides an affirmative defense to insider trading liability if the trades are made pursuant to a written plan or trading instruction entered into when the trader was not aware of MNPI. Over the years, there has been considerable concern that insiders were abusing Rule 10b5-1 plans by adopting plans just prior to trading, adopting multiple plans, or even terminating plans when they turned out to be unprofitable. The SEC recently adopted new rules designed to curb some of the more abusive practices, but one significant problem remains: while Rule 10b5-1 plans are supposed to be irrevocable, insiders who back out of plans have so far escaped liability under the central anti-fraud provision of the federal securities laws, principally because a violation of that provision requires an actual trade.
The issue of “insider abstention”—insiders who decide not to trade based on MNPI—has long bedeviled insider trading law and policy. Insider abstention is typically undetectable and unknowable, raising insurmountable issues of proof, while the general requirement that fraud be “in connection with the purchase or sale of a security” imposes a rigid legal barrier. But Rule 10b5-1 plans stand on a different evidentiary footing: they are written plans, communicated to third parties, creating a clear record of intent. The only real question is whether legal liability can attach in the absence of an actual purchase or sale of a security.
Traditionally, the answer to this question has been no. The SEC staff has stated on a few occasions that cancellation of a Rule 10b5-1 plan would not in itself lead to liability under Rule 10b-5 because terminating a plan would not meet the “in connection with” requirement. However, Rule 10b5 is not the only statutory provision that has been used to prosecute insider trading. The SEC has frequently prosecuted insider trading under Section 17(a) of the Securities Act, a provision that applies not only to the “sale” of securities but extends more broadly to “offers” to sell securities. And criminal authorities have increasingly been prosecuting insider trading under mail and wire fraud statutes that do not have an “in connection with” requirement at all. These other statutory provisions could provide a basis for insider trading liability in the context of a cancelled or terminated Rule 10b5-1 plan
Labor Market Traps
Full text linkSome products, notably but not only platforms, increase in value for users as the number of other users increases. These interaction or network effects can result in “product market traps” (Bursztyn et al., 2023) where people who use the product would be better off if they all stopped using it and switched to another product, but cannot because of coordination problems. A parallel but overlooked phenomenon is the labor market trap, where employees would be better off if they collectively left an employer, job, or profession, but cannot because of the difficulty of coordination. Product market and labor market traps pose a challenge to public policy because of the complexity of people’s behavior in networks, but can be mitigated in some cases with relatively simple taxes and regulatory interventions
Advancing Racial Justice Through the Restatement of Children and the Law: The Challenge, the Intent, and the Opportunity
Full text linkSelf-Insuring against Liability Risk: Evidence from Physicians’ Home Values in States with Unlimited Homestead Exemptions
No full textWe study whether individuals self-insure against uninsured liability risk by exploiting variations in state laws that allow individuals to protect some portion of the value of their homes against creditors. We test whether physicians take advantage of these laws to invest more in their homes to protect assets from malpractice claims exceeding liability policy limits. In states with unlimited homestead exceptions—laws that protect home equity from recovery by creditors—physicians invest 13 percent more in home value than in the absence of an exemption. Effects are larger where liability risk is greater; no effect occurs for other professionals of similar family income, family size, demographics, and city of residence. Our evidence suggests that individuals manipulate their financial assets to self-insure against liability risk when insurance markets are incomplete
Subsidiarity and the Best Interests of the Child
Full text linkIn the context of adoption, subsidiarity is the principle that children should remain with their birth families whenever possible, and whenever not possible, that in-country placements should take precedence over intercountry adoption. This Comment looks at the specific meaning of subsidiarity in the Hague Convention on Protection of Children and Co-operation in Respect of Intercountry Adoption. It highlights that the convention does not require intercountry adoption be a last resort, but rather that “due consideration” be given to placements “within the State of origin.” Then, the Comment looks at the domestic law of India, Colombia, and South Korea, three of the main sending countries in intercountry adoption, as case studies to see how these countries have implemented subsidiarity over time. It reveals a broad trend of these countries implementing stricter and stricter conceptions of subsidiarity over time and concludes that presently all three countries go far beyond what the convention requires, potentially in ways that undermine the best interests of the child
The Cost of Favoritism in Public Procurement
No full textAre political connections in public procurement harmful or efficiency gaining for the public sector, and what are the costs of favoritism toward politically connected firms? Exploiting detailed data on firm representatives’ political affiliations in the Czech Republic, we find that favoritism toward politically connected firms increases the price of procurement contracts by 6 percent of the estimated costs, while no gains in terms of quality are generated. Interestingly, these adverse effects of political connections are mitigated by additional oversight from a higher level of the government because they are cofunded by the European Union. On the basis of our estimates, total procurement expenditures increased by .36 percent owing to favoritism
Outsourcing Electricity Market Design
Full text linkA basic principle of virtually every regulation to improve grid reliability and reduce power sector emissions is that market participants change their behavior when regulations make it more expensive to engage in socially harmful activities. To give a concrete example, a carbon tax assumes that increasing the costs of emitting carbon dioxide will lead market participants to reduce energy consumption and switch to less carbon-intensive resources.
But this assumption does not apply to large parts of the electricity industry, where investor-owned utilities are often able to pass the costs of climate and reliability rules on to captive ratepayers. The underlying problem, I argue, is that the U.S. legal system outsources investment and market design decisions to private firms that will be financially harmed if state and federal regulators pursue deep decarbonization or take ambitious steps to improve grid reliability. At the state level, this occurs because utilities propose new infrastructure in integrated resource plans that authorize cost recovery from captive customers. At the federal level, this occurs because the Federal Power Act gives incumbent utilities “filing rights” that authorize them to submit, or “file,” regulations and rates related to their assets. Utilities use their filing rights both to propose favorable market rules and to design governance structures that allow them to control the multimember organizations that plan grid infrastructure and ensure resource adequacy. Given that regulatory environment, it is little surprise that incumbent utilities design electricity market rules that counteract climate and reliability regulations. These observations underscore that structural changes such as full corporate unbundling, market liberalization, and aggressive governance reforms are needed to make climate and reliability policies more effective and easier to administer
The Loan Market Response to Dropdown and Uptier Transactions
No full textTwo innovative methods of subordinating first-lien lenders to newly issued debt—so-called dropdown and uptier transactions—have become important options when a restructuring looms. We weigh concerns about borrowers’ power and the loan market’s capacity to produce efficient contracts by examining the extent to which the terms of newly originated loans changed after two salient transactions: J. Crew’s dropdown, in 2016, and Serta Simmons’s uptier, in 2020. Our primary result is a contrast. Loans originated after the Serta transaction became much more likely to block uptier transactions, which suggests that loan contracts can adjust rapidly to curtail borrowers’ flexibility. Conversely, the frequency of loans susceptible to a dropdown transaction changed little after the J. Crew transaction, which suggests that giving borrowers flexibility to repledge collateral may be valuable. In a range of loans, the optimal contract may permit borrowers to subordinate lenders by one means but not the other