Law & Econ of Consumer Protection

Today and tomorrow I’m participating in a workshop on consumer protection at the George Mason Law & Economics Center (LEC). The line up includes some interesting speakers, including Howard Beales, James Cooper, and TOTM co-blogger Paul Rubin.

The workshop is part of a Privacy Fellows program the LEC is organizing this year, involving scholars from a range of disciplines, to stimulate research related to issues of data privacy and the regulation of data collection and use. This is an area in which there is relatively little work.

And in other “consumer protection” news, Michigan’s governor opted to bow to the traditional auto industry cronies and signed anti-Tesla legislation into law. One could say it’s just one more step in a decades-long string of anti-consumer protections of a politically powerful industry.

Crony capitalism wins again; consumers and innovators be damned.

The Economics of Jimmy John’s “Freaky” Non-compete Clause

Jimmy John’s, the national sub-sandwich company known for being “freaky good, freaky fast,” has been in the news for being rather freaky about having employees sign non-compete clauses as part of their standard labor agreements.

Non-compete clauses are not uncommon for senior executives, technology professionals, or professionals whose business is built on client relationships, like lawyers or sales representatives. And although an article in the New York Times this summer highlights how non-compete clauses are increasingly appearing in unexpected places, one certainly wouldn’t expect such an agreement as a condition of employment at a sandwich shop–unless maybe it was to protect the time-warp technology for their freak fast delivery.

There’s just one problem with the hype in the media around this issue: most of it is ignoring some important facts that call into question just how big a deal this is, except as a media stunt for some disgruntled employees. For example: Continue reading

A Tilted Level Playing Field For Farmers

Yesterday, the World Trade Organization ruled in favor of the United States on claims that India had violated trade rules by prohibiting imports of US poultry, meat, eggs, and live pigs on “phytosanitary” (i.e., food safety) grounds. The WTO ruling is available here.

US farmer organizations were predictably thrilled by the ruling, since it may force India to open up it’s market to the tune of $300 million a year. I was particularly taken by this quote in the Des Moines Register by David Miller, director of research and commodity services for the Iowa Farm Bureau Federation:

“Iowa and U.S. farmers want a level playing field for international trade and we are confident that the WTO dispute resolution process provides an avenue for that to happen.”

I can only assume, then, that the Iowa Farm Bureau will also support removing the protectionist US sugar program, which restricts sugar imports and causes the price of sugar in the US to be 2 to 3 times higher than the world price of sugar. A recent study by Beghin and Elobeid published in the journal Applied Economic Perspectives and Policy suggests that eliminating the sugar quota would make US consumers better off to the tune of $2.9 to $3.5 billion per year and create as many as 20,000 new jobs.

Of course, that would come at a cost to Iowa corn farmers, who benefit greatly from inflated sugar prices that create a market opportunity for high-fructose corn syrup. Or perhaps what Mr. Miller meant is that Iowa and US farmers want a level playing field for international trade, as long as it tilts in their favor.

A Review of Occupational Licensing

This week the US Supreme Court is hearing arguments in the case of North Carolina Board of Dental Examiners v. Federal Trade Commission, addressing the questions of whether (or under what terms) state occupational licensing boards are immune from antitrust scrutiny. This is the case I referred to last week and linked to the preview of the arguments on SCOTUSblog.

Today I ran across a review of Morris Kleiner’s recent book, Stages of Occupational Regulation: Analysis of Case Studies, on Econ Journal Watch. Uwe Reinhardt (Princeton) provides a great overview of the general issue and Kleiner’s treatment of it. Below is the abstract of Reinhardt’s review:

The licensing of occupations—a very forceful intervention in markets—is pervasive and growing in modern economies. Yet the attention paid to it by economists and economics textbooks has been small. Highly welcome, therefore, has been the extensive and intensive work on this subject by Morris Kleiner. Kleiner’s latest book, titled Stages of Occupational Regulation: Analysis of Case Studies (2013), explores the progression of occupational regulation, from mere registration to certification to outright licensing—three distinct stages. Kleiner carefully selects for his analysis a series of occupations representing the stages of regulation, devoting a chapter to each occupation. He uses a variety of statistical approaches to tease out, from numerous databases, what the impact of mild to heavy regulation on labor markets appears to be.

Kleiner’s work leads him to call for a pervasive review of occupational regulation in the United States, with a view towards replacing occupational licensure, which introduces the most inefficiency and welfare loss, with mere certification of occupations. That recommendation gains plausibility in an age where cheap computation and data mining makes it possible to protect consumers from low-quality and possibly dangerous services by providing robust, user-friendly information on the quality of services delivered by competing occupations, such as doctors and nurse practitioners.

You can access the full article here. I may need to add Kleiner’s book to my list of fun-things-to-read-when-I-get-a-chance.

Occupational Licensing & Antitrust: Legal Licensing or Occupational Cartel?

Occupational licensing is an interesting phenomenon. Governments (state and local) create certification boards (typically made up of industry participants) that set licensing standards and qualifications for persons wanting to work in those occupations. Ostensibly, these restrictions are intended to correct for the information asymmetry between consumers and professionals, where consumers may not be able to assess the quality (or ability) of the professional independently before hiring them. Think medical associations for doctors and bar associations for lawyers at the state level, or licensing for plumbers and electricians at the local level.

But occupational licensing also serves as a way of restricting competition in a profession by limiting the number of people who are able to provide the goods or services under the board’s purview. And as we know, reducing supply in the market increases the prices consumers pay (and the professionals receive). For instance, a medical board may limit the number of doctors who will be “board certified” in a given year. A private investigator licensing board may set standards to reduce the number of licensed (and legal) PIs. Or a state dental board might prohibit non-dentists from performing teeth-whitening services in competition with dentists.

That last one is the basis of a case coming before the US Supreme Court next week. The US Federal Trade Commission (FTC) brought antitrust charges against the North Carolina Board of Dental Examiners for conspiring to restrain competition in the teeth whitening business. The Dental Examiners board asserts they are exempted from antitrust law under the “state action doctrine.” The Supreme Court is being asked to determine if–and under what circumstances–state occupational licensing boards are exempt from antitrust laws. Eric Fraser offers a nice preview of the arguments in the case over on SCOTUSblog.

This could be an important case for licensing boards across the country. It should be fun to watch and interesting to see how the Court delineates the lines of necessary government oversight and the degree to which an overwhelming public interest needs to be justified.

Corporate Control and a New ‘Family’ for Olive Garden

For years, Olive Garden’s marketing campaign revolved around the theme: “When you’re here, you’re family.” Well it looks like Olive Garden–or more specifically, it’s parent company Darden–has a new family at the helm.

Reports are out that Starboard Value L.P. has successfully routed the entire incumbent board of directors, replacing them with its own slate of 12 new members. This is the culmination of a lengthy dispute about recent strategic decisions and the future direction of Darden Restaurants and its portfolio of restaurants that includes Olive Garden, Longhorn Steakhouse, The Capital Grille, Bahama Breeze, and others.

I don’t have data, but my sense is that such complete board turnover is very rare outside of a change in corporate ownership. I tried to find some evidence on how frequently complete board turnovers happen. The closest thing I found thus far is a report by Equilar looking at board turnover among the Fortune 1500 for the fiscal year ending April 2012. They found only 54% of the 1,445 companies they looked at had any turnover at all. Only 1% had more than 50% of board members turn over. The don’t report whether any firm had 100% turnover. Perhaps someone with out there has numbers handy (or some time to do the digging) to shed light on this?

Outcomes like this certainly reinforce the idea that Lucian Bebchuk and company have been promoting with the Shareholder Rights Project at Harvard Law School; namely, that eliminating staggered boards (i.e., having the full board stand for election every year) can allow for more effective changes in corporate control even without a change in corporate ownership, making companies more responsive to their current shareholders.

Incentives and the SCOTUS Surprise on Same-Sex Marriage

The Supreme Court of the United States (SCOTUS) surprised even veteran court watchers this week by refusing to hear a set of cases involving state-level bans (and reversals of those bans) of same-sex marriage. One lawyer offers a pretty convincing argument on why the Court decided not to weigh in on an issue that has such important consequences for large groups of people (and employers). At its heart, it’s all about individual justices’ incentives and the cost-benefit calculation justices had to make in the face of an uncertain outcome:

So why is the Roberts Court, not normally shy in jumping into controversial issues such as affirmative action or campaign finance law, ducking this one?

The answer may lie in the incentives facing the individual Justices rather than the approach of the Court as a whole. When you look at the choices available from the three different perspectives on this issue – liberals, swing votes, and conservatives – it becomes much easier to see why there weren’t the four votes required (out of the nine Justices) to hear this issue now. With no camp assured of victory if the court decided to hear the cases, the uncertainty may hold the key to the Justices’ thinking.

You can read the full blog post with the details of the explanation here. Regardless your position on the issue, this analysis of the justices’ likely reasoning in passing on the opportunity to settle the issue (at least for a period of time) illustrates how understanding individuals’ incentives helps to explain the expected–and not-so-expected–outcomes that shape the laws and institutions that help structure society at-large.