Spring 2018

February 5th, 2018 (Monday) at 12:10 PM

Cristie Ford

  • Associate Professor, Allard School of Law, University of British Columbia 


Jerome Greene Hall, room 646  


Sedimentary Innovation: Responding to Incremental Change

Precis of Cristie Ford, Innovation and the State: Finance, Regulation, and Justice
(Cambridge University Press, 2017)

What if the greatest challenge facing regulation today is not erratic executive action, or lack of political will, or under-resourcing (though of course these matter)? Instead, what if the most profound and significant challenge facing regulation – not only today, but continually – is private sector innovation?

Innovation is the product of that most cherished good, human creativity. It carries with it the prospect of problems solved and diseases eradicated, of fresh adventures and a larger pie. Sometimes the debate is more nuanced, but for most people most of the time, to be anti-innovation is still to be unenlightened, fearful, backward, and blind to possibility. Change-resisters – individuals, corporations, states, even species specialists like migratory songbirds and polar bears – are doomed, often tragically, to the wrong side of history. Our public policy choices and our public dialogue endlessly reflect this, often speaking of innovativeness as if there could be no higher compliment.

Yet we should also consider innovation’s unpredictable effects on the regulatory landscape it occupies. Sometimes we fail to see the effects of innovations until they collect, as if suddenly, in unexpected locations (much as risk collected in over-the-counter derivatives markets in 2007-08). In fact, those innovations may have built up over time but only registered with us after they had reached a certain critical volume. In this way, innovation is like water: a single droplet is rarely remarkable on its own, but many droplets together matter quite a lot. Moreover, innovation runs down avenues of opportunity, whether or not those outside the innovative process recognize those avenues. Innovation will run under, around, and over obstacles (including seemingly-clear regulatory requirements).

Innovation is also like water in its potentially corrosive effect. In the language of the business scholars, it is “disruptive”. Decentralized, private sector innovation creates its own opportunities. It can open up novel and unexpected ways of working that challenge existing divisions of responsibility between regulators. It can destabilize or swamp regulatory structures, sometimes in obvious ways but sometimes in latent or inconspicuous ones. Even innovation that undermines and disrupts core components of regulation can sometimes be hard to track until it is very far along, by which point it will have gained momentum, interests and defenses will have coalesced around it, and it may have become hard to contain. If the regulatory obstacle is a rigid rules-based requirement, running around it is relatively straightforward. (Think of Enron and rules-based US GAAP accounting rules.) But the financial crisis demonstrated that more flexible or market-based regulatory regimes, like those underpinning the former Basel II Capital Adequacy Regime or the Asset-Backed Commercial Paper exemption from securities disclosure rules, are not immune to innovation’s corrosive effects.

If we want to improve regulatory effectiveness, the first step must be to get some distance from the romantic, almost magical conception of innovation that dominates popular and academic discourse. We need to recognize that innovation, almost by definition, is a profound and direct challenge to regulation in all its forms. This is the project that my recent book, Innovation and the State: Finance, Regulation, and Justice (Cambridge University Press 2017), tackles.

The familiar radical-versus-incremental-innovation dichotomy is a useful, if imperfect, place to start to think about the phenomenon. “Radical” innovations are thought to represent fundamental breaks, step changes, paradigm shifts; “incremental” innovations are the product of iteration, tweaking, and diffusion, producing gradual evolution. Accepting this for a moment, the velocity and magnitude of change that a particular innovation brings with it will change the regulatory challenges it throws up. For example, when confronted with a radical, or what I call “seismic,” innovation (the existence of which will always be a matter of degree), the main problems for regulators will be caused by lack of data, lack of comparators, and what Frank Knight in 1921 described as genuine uncertainty – the “unknown unknowns.” Think of the rapid growth of deepwater oil drilling, or the sudden explosion of cryptocurrencies and cryptocurrency markets today. This is a particular kind of regulatory problem, which demands particular kinds of regulatory solutions. For example, ex ante licensing regimes, plus effective information-forcing mechanisms, could be reasonable ways to try to slow down innovation while the regulator addresses the data scarcity problem. A brave regulator should be willing to consider them.

By contrast, most innovation proceeds in a more incremental way, through what I call “sedimentary” layers of innovation. This is exactly the kind of innovation that our regulatory scholarship, from Brandeis’s “parallel laboratories for democracy” onward, seeks to celebrate and reward. In this version, each new layer of practice or product, on its own, is fairly unremarkable. It does not trigger any alarm bells. Cumulatively, however, the layers can add up to very significant change. Think perhaps of the recent growth of social media as a force in society (and politics), or the ways in which the “business of banking” in the United States changed and expanded in stages through the late 20th century. The regulatory challenge in these cases is that, like the apocryphal story of the frog in boiling water, we fail to notice the change until we are a long way from safety. Because humans are poor at recognizing and responding to slow-moving, aggregative change in real time, that is the capacity that needs to be built into the regulatory framework itself. Rather than developing ex ante licensing regimes, for example, as one might when facing a seismic innovation, regulators might be better off focusing on developing better systems for tracking and responding to change, in real time and across time.

Innovation is a complex, multifactorial phenomenon, and developing regulatory responses to it is a challenging undertaking. The book concludes by proposing a framework of questions and strategies, drawn from its case studies, for addressing the technical challenge of regulating in the face of innovation.

Yet these are not only technical questions. Regulation is at the leading edge of politics and policy in ways that we do not always fully grasp. Seemingly innocuous regulatory design choices have clear and profound practical ramifications for many of our most cherished social commitments. Groups of people win, and lose, when innovation changes the ground rules. And financial regulation in particular is a crucial site for addressing domination in some of its most embedded and pernicious forms. Innovation must be understood not only in technical terms, but also in human ones. We need a regulatory structure that employs good technique, while also staying attuned to the broader equality, justice, and fairness concerns that animate and inform our regulatory priorities.

March 5th, 2018 (Monday) at 12:10 PM

Zen Shishido

  • Professor of Law, Hitotsubashi University Graduate School of International Corporate Strategy
  • Short-Term International Visiting Professor of Law, Columbia Law School


Jerome Greene Hall room 646


Japan Is Changing: Freedom of Change and Complementarity between Inter- and Intra- Corporate Systems
Ronald Gilson & Zenichi Shishido


In the Japanese corporate system from the 1960s to the 1980s, three factors–strong internal governance (i.e., company community), weak external governance (i.e., mochiai-main bank governance), and relationship-based B2B transactions (i.e., keiretsu)–were considered to be complementary of each other.

Today, Japan is changing. Amidst this process of change, we observe the following two phenomena. First, within a single country, there are various speeds and directions of change, depending on the industry and the company.  Second, while B2B transactions and external governance have changed in many respects, it seems as though internal governance has not changed so much.

These two phenomena can be explained by the following hypothesis. First, B2B transactions and corporate governance are complementary, and can be characterized by a balance between exit-oriented factors and trust-oriented factors. Second, internal governance and external governance are substitutive. The corporate governance of each company will strike a balance between the two. And third, the speed of change is different between B2B transactions and corporate governance because internal governance is not easy to change without strong initiative by the controlling shareholder.

April 11th, 2018 (Wednesday) 12:10 PM

Patrick Bolton

  • Barbara and David Zalaznick Professor of Business and Professor of Economics
    Columbia Business School, Columbia Law School, & Columbia Economics Department.


JG 501


Investor Ideology


This paper analyzes the voting patterns of institutional investors from their proxy voting records. It estimates a spatial model of voting, using the W-NOMINATE scaling for voting in legislatures. We find that institutional investors’ ideology (or ideal points) can be mapped onto a left-right dimension, just as legislators’ ideologies can be represented along a left-right spectrum. The far-left investors are socially responsible investors and the far-right investors are “greedy” investors, those opposed to proposals that could financially cost shareholders. There are significant ideological differences across institutional investors and there is no shareholder unanimity. The proxy adviser Institutional Shareholder Services (ISS) plays a role similar to a political party. A second adviser, Glass Lewis, has fewer followers. We find that the ideology of ISS is center-left, to the left of most institutional investors and Glass Lewis. Furthermore, Vanguard and Blackrock are center-right, and the ideology reflected in management proposals and voting recommendations is far to the right.  Investors on the left support a more social orientation of the firm on environmental and other issues. They also support fewer executive compensation proposals.

April 16th, 2018 (Monday) at 12:10 PM

Curtis Milhaupt & Jeffrey Gordon


JG 807


China as a "National Strategic Buyer": Towards a Multilateral Regime for Cross-Border M&A


In recent years China has become a major player in cross-border mergers and acquisition activity, $180 billion in announced transactions in 2017. This activity has been highly-skewed to outbound M&A, 85% overall measured by value. In the case of transactions for control, vis-à-vis the US and Europe, China was on the outbound side for over 95% in 2016 and in 2017, measured by value. The asymmetry between inbound and outbound M&A may be of less concern than the asymmetry of M&A motives, for Chinese acquirers are not categorized as “financial buyers” or “strategic buyers” but rather “national strategic buyers” (NSBs), meaning that their M&A activity is subject to nationally directed economic objectives.  The rise of NSBs threatens to destabilize the cross border M&A regime, which has operated under a permissive and facilitative framework in which acquirers and targets have pursued commercial and financial objectives subject to occasional protectionist constraints on the target side but not to the mercantilist objectives of states.  The article argues that the problem of “asymmetric motives” can be mitigated through adoption of a multilateral regime under which firms (whether state-owned or privately-owned) subject to potential government influence in their corporate decision-making must demonstrate “eligibility” to engage in outbound M&A.  The “eligibility” regime includes a commitment to undertake outbound M&A activity only for commercial and financial motives, not at the behest of a government.  This commitment must be vetted for particular transactions by independent directors selected by foreign investors, who in turn must be entitled to obtain at least 25 percent of the firm’s cash flow rights.  An international secretariat would monitor compliance and nations could adopt legislation that would permit rejection of acquisitions of local targets for non-compliance. Our view is that China’s desire to mitigate the building backlash against its mercantilist conduct may lead to agreement to a cross-border M&A regime  harmonized in this way.

April 25th, 2018 (Wednesday) at 12:10 PM

Andrew F. Daughety & Jennifer F. Reinganum

  • Andrew Daughety is the Gertrude Conaway Vanderbilt Professor of Economics and Professor of Law (by Courtesy), Department of Economics and Law School, Vanderbilt University.
  • Jennifer Reinganum is the E. Bronson Ingram Professor of Economics and Professor of Law (by Courtesy), Department of Economics and Law School, Vanderbilt University.


JG 546


Evidence Suppression by Prosecutors: Violations of the Brady Rule

Figures for article


We develop a model of individual prosecutors (and teams of prosecutors) to address the
incentives for the suppression of exculpatory evidence. Our model assumes that each individual
prosecutor trades off a desire for career advancement (by winning a case) and a disutility for
knowingly convicting an innocent defendant. We assume a population of prosecutors that is
heterogeneous with respect to this disutility, and each individual’s disutility rate is their own private
information. A convicted defendant may later discover exculpatory information; a judge will then
void the conviction and may order an investigation. Judges are also heterogeneous in their
opportunity costs (which is each judge’s private information) of pursuing suspected misconduct.
We show that the equilibrium information configuration within the team involves concentration of
authority about suppressing/disclosing evidence. We further consider the effect of angst about
teammate choices, office culture, and the endogenous choice of effort to suppress evidence.

April 30th, 2018 (Monday) at 12:10 PM

Bernard Black

  • Nicholas J. Chabraja Professor, Northwestern University Law School; Professor of Finance


JG 646


The Effect of Disability Insurance Receipt on Mortality


This paper estimates the effect of Disability Insurance and Supplemental Security
Income benefit receipt on mortality, for those on the margin to receive benefits or
not. Those receiving benefits receive large cash transfers, and health insurance from
Medicare or Medicaid, but also face important work disincentives. Each of these factors
could affect mortality. The income and health insurance benefits likely reduce
mortality, but the work disincentive could increase mortality. Identifying the overall
mortality effect is difficult, however, because those allowed benefits may be unobservably
less healthy than those denied. We exploit the random assignment of judges to
disability insurance cases to create instrumental variables that address this selection
problem. We find considerable heterogeneity in the mortality response. For marginal
recipients, who receive benefits if seen by lenient judges, but would be denied by stricter
judges, we find no detrimental effects of being denied on mortality. Instead, we find
higher mortality for these individuals within the first 10 years of benefit receipt, consistent
with the view that working is beneficial for health. However, Marginal Treatment
Effects estimates suggest that benefit receipt reduces mortality for inframarginal benefit
recipients, who would receive benefits even if seen by a relatively strict judge.
These findings suggest that for maximizing the longevity of DI applicants, the current
disability thresholds are close to the right level.