Tag: Economics

Toward a Unified Theory of Exclusionary Vertical Restraints – Article by Daniel A. Crane & Graciela Miralles Murciego

From Volume 84, Number 3 (March 2011)
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The law of exclusionary vertical restraints–contractual or other business relationships between vertically related firms–is deeply confused and inconsistent in both the United States and the European Union. A variety of vertical practices, including predatory pricing, tying, exclusive dealing, price discrimination, and bundling, are treated very differently based on formalistic distinctions that bear no relationship to the practices’ exclusionary potential. We propose a comprehensive, unified test for all exclusionary vertical restraints that centers on two factors: foreclosure and substantiality. We then assign economic content to these factors. A restraint forecloses if it denies equally efficient rivals a reasonable opportunity to make a sale or purchase (depending on whether the restraint affects access to customers or inputs). Market foreclosure is substantial if it denies rivals a reasonable opportunity to reach minimum viable scale. When substantial foreclosure is shown, the restraint should generally be declared illegal unless it is justified by efficiencies that exceed the restraint’s anticompetitive effects.

 

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Mixed Systems in Legal Origins Analysis – Note by Kensie Kim

From Volume 83, Number 3 (March 2010)
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A “hybrid” or “mixed” country can be defined as having substantial common and civil elements in its legal system. Hybrid countries have been an overlooked aspect of legal origins literature. This study’s comparative analysis finds that most hybrids have experienced moderate to high economic growth rates, began as civil law countries, and maintained predominantly civil law–based property and contract law, while uniformly adopting common law–based corporate and securities law.

 

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Rewriting Frankenstein Contracts: Workout Prohibitions in Residential Mortgage-Backed Securities – Article by Anna Gelpern & Adam J. Levitin

From Volume 82, Number 6 (September 2009)
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Modification-proof contracts boost commitment and can help overcome information problems. But when such rigid contracts are ubiquitous, they can function as social suicide pacts, compelling enforcement despite significant externalities. At the heart of the current financial crisis is a contract designed to be hyperrigid: the pooling and servicing agreement (“PSA”), which governs residential mortgage securitization. The PSA combines formal, structural, and functional barriers to its own modification with restrictions on the modification of underlying mortgage loans. Such layered rigidities fuel foreclosures, with spillover effects for homeowners, communities, financial institutions, financial markets, and the macroeconomy.

This Article situates PSAs in the context of theoretical and policy debates about contract rigidity, bond contract modification, and contractual bankruptcy. We propose a typology of contract rigidities, ranging from formal prohibition on amendment (formal rigidity) to extreme collective action problems (functional rigidity). We then draw on New Deal jurisprudence for strategies to overcome each type of rigidity. These strategies include narrowly tailored legislation that renders the problematic terms unenforceable on public policy grounds, administrative restructuring mandates, and special bankruptcy regimes.

 

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