Tesla, Dealer Franchise Laws, and the Politics of Crony Capitalism

About a year ago I posted a couple of pieces (here and here) related to auto dealers’ attempts in various states to shut down Tesla’s direct-to-consumer distribution system. Dan Crane (Michigan Law) has a recent paper on the issue available at SSRN. Below is the abstract:

Tesla Motors is fighting the car dealers’ lobby, aided and abetted by the legacy Detroit manufacturers, on a state by state basis for the right to distribute its innovative electrical automobiles directly to consumers. The Tesla wars showcase the important relationship between product innovation and innovation in distribution methods. Incumbent technologies may block competition by new technologies by creating legal barriers to innovative distribution methods necessary to secure market acceptance of the new technologies. While judicial review of such special interest capture is generally weak in the post-Lochner era, the Tesla wars are creating new alliances in the political struggle against crony capitalism that could contribute to a significant re-telling of the conventional public choice story.

10th Annual Conference on Empirical Legal Studies

The 10th Annual Conference on Empirical Legal Studies will be held October 30-31, 2015, at Washington University in St. Louis. Sponsored by the Society for Empirical Legal Studies, and hosted by Washington University School of Law and the Center for Empirical Research in the Law, the conference will bring together hundreds of scholars from law, economics, political science, psychology, policy analysis, and other fields who are interested in the empirical analysis of law and legal institutions. The Call for Papers will be published in April. Submissions are due June 26. See the conference page for more details.

Ex Ante vs Ex Post Licensing

Ralph Siebert has an article in the Journal of Competition Law & Economics on “What Determines Firms’ Choices Between Ex Ante and Ex Post Licensing Agreements,”  which looks at the timing of licensing agreements around research joint ventures in the semiconductor industry. He finds that expectations about potential patent blocking affect the decision of when to license, as do transaction costs, and technology and product market characteristics. His data don’t include much about the specifics of the licensing agreements, but the results are pretty interesting nonetheless. Below is the abstract:

I investigate whether licensing agreements are an appropriate tool for firms to resolve blocking and hold-up problems in high-tech industries. I use a novel and comprehensive database on licensing agreements as well as detailed firm-level information on revenues and patents in the semiconductor industry from 1989 to 1999. It would be interesting to evaluate the post-1999 time period, but data constraints prevent me from doing so. I estimate a bivariate probit model accounting for endogenous selection. I find that different types of licensing agreements, that is, ex ante and ex post licensing agreements, help firms eventually resolve realized blocking. Firms engage in licensing before inventing a new technology (ex ante licensing) if they believe competitors hold patents that can potentially block the commercialization of their technology. In contrast, firms engage in licensing after inventing the technology (ex post licensing) if other firms hold patents that block the commercialization of the technology. The estimation results also show that firms’ activity in technology and product markets plays an important role in explaining choices between ex ante and ex post licensing agreements. It should be kept in mind that the semiconductor industry is high-paced and the data patterns might have changed after 1999.

State Contract Law and Debt Contracts

An interesting paper by Colleen Honigsberg, Sharon Katz (both at Columbia) and Gil Sadka (Univ. of Texas at Dallas) in the November 2014 issue of the Journal of Law & Economics (available here) looks at differences in debt contract terms based on the state’s contract law which governs the debt contract. A number of papers have studied factors affecting the use of various types of covenants and contract terms for debt agreements, but none previously have accounted for variation in state contract laws. Below is the abstract:

This paper examines the relationship between debt contracts and state contract law. We first develop an index to evaluate whether each state’s law is favorable or unfavorable to lenders. We then analyze how the contract terms, the frequency of covenant violations, and the repercussions of covenant violations vary across states. We find that cash collateral is most likely to be used when the contract is governed by law that is favorable to debtors and that out-of-state borrowers who use favorable law pay higher yield spreads. In addition, when the law is favorable to lenders, there are significantly fewer covenant violations, and the repercussions of covenant violations—measured as changes in the borrower’s investment policy—are more severe. We also compare the characteristics of relevant parties across states, and the results provide support for the theory that there is a market for contracts similar to the market for incorporations.

Bye-Bye Bookstores

When you read a story about a local bookstore going out of business, you kind of expect the culprit to be lost business to on-line retailers (e.g., Amazon), e-book sellers (e.g., Amazon’s Kindle or Apple’s iBooks), or maybe, just maybe, a large brick-and-mortar bookstore (e.g., Barnes & Noble ). And while it may make one sad, at least one can understand the consequences of competition.

What you wouldn’t normally expect is that the store’s loyal customers and local citizens voted to shut it down–without even knowing it. But apparently that’s exactly what happened to the beloved Borderlands Bookstore in the Mission District of San Francisco according to the Bay Area’s ABC 7 News. As a result of the voter-approved increase in minimum wage, the bookstore can’t afford to remain open and has announced it will close at the end of March.

“You know, I voted for the measure as well, the minimum wage measure,” customer Edward Vallecillo said. “It’s not something that I thought would affect certain specific small businesses. I feel sad.”

The San Francisco Board of Supervisors seemed to have expected it though, but they forwarded the initiative to the voters nonetheless:

“I know that bookstores are in a tough position, and this did come up in the discussions on minimum wage,” San Francisco supervisor Scott Wiener said.

Apparently Wiener takes comfort that it was the will of the people, with 77% voting in favor of the increase. But this just really points out a problem in what is often a democratic-wannabe, spineless-republican form of government. Legislators pander to interests and ideas they know are bad for the economy, but pass the buck on responsibility by “letting the voters decide”.

And while Jonathan Gruber was mocked for saying Obamacare supporters had to hide the details because of the stupidity of the American voters, time and again local (and state-wide) referenda on things like minimum wage give credence to his claim. The average voter either has no clue about how markets really work or is tremendously myopic in thinking through the consequences of the policies they support…most likely, both. (Although, if voters were more economically competent, Obamacare supports would have had even more reason to hide the details.)

So the chickens have come home to roost in San Francisco. If you go there, plan to leave your heart…and your money…but don’t plan on enjoying the beloved local bookstores. Or the many other small, local businesses that can ill-afford an arbitrary (in this case, 50%) increase in their labor costs. Because that’s what minimum wage laws do.

The Moral Heart of Economics

That’s the title of Edward Glaeser‘s Economix blog post in the New York Times today. In it, Glaeser points out that beneath the mathematics of modern economics is a fundamental moral core of individual freedom. It’s a great read for understanding that economics is more than a set of mathematical models and calculations. The conclusion (below) captures it well, but I suggest you click through and read the whole piece.

Economists are often wary of moral exhortation, as many see the harm so often wrought by arguments that are long on passion and short on sense. But don’t think that our discipline doesn’t have a moral spine beneath all the algebra. That spine is a fundamental belief in freedom

(Not-so) Public Higher Education

NPR reported yesterday on a Government Accountability Office (GAO) report which finds that as of Fiscal Year 2012 (the 2011-12 school year), more of public colleges’ revenues came from students’ tuition than from state (public) funding. The following graph from the GAO report shows the breakdown in revenue sources over the previous 10 years:

gao-college-funding_wide-4b0e1c3e43499af008def569adef93a7909ae7cb-s700-c85As a faculty member at Missouri’s flagship public university, all I can say is, “Welcome to the party! What took you so long?” At the University of Missouri, tuition topped State appropriations for the first time in 2004. According to the FY13 Budget Book for the University of Missouri System (which includes four autonomous campuses and two hospital systems), State appropriations constituted less than 15% of ScreenHunter_01 Jan. 06 13.57total revenue, with another 2% from State grants. The table to the right shows the breakdown by each “business segment” of the University system. For the flagship campus (MU), net tuition and fees were 40% more than State appropriations. The largest source of income for the University came from “sales and services of educational activities and auxiliary enterprises.” That includes things like Residential Life and Campus Dining (which are also paid by students), Parking & Transportation Services, the University Store (which is much more than just textbooks, but includes those as well), and Athletics (which proudly boasts that it is self-funding from ticket sales, radio and television revenues, licensing, etc.).

The neighboring graph from the University’s 2014 Budget Update shows the breakdown of MU’s Operating Budget revenue, which might be ScreenHunter_02 Jan. 06 14.12considered the heart of the direct educational expenses. It shows that over the past 25 years, State support has dropped from 70% to just 32% of operating revenue. Meanwhile, tuition has increased from just 27% to 62% of operating revenue. And this over a period of time that operating expenditures increased, so tuition is a much bigger slice of an even bigger pie. Looking at the University as a whole (not just operating), students foot the bill for about 33% of total revenues (including room and board) compared to just under 17% in State funding. And that doesn’t include parking fees or bookstore purchases.

Some complain about the cost of higher education skyrocketing, and total expenditures have increased substantially (largely a result of increased administrative expenses). However, when students complain about the costs of higher education, they are focused on their tuition bills. And tuition has gone up at public universities, no doubt. Since 2000, the average annual increase in tuition at MU is about 16% (much of that in the early 2000s), which is much higher than the rate of inflation. But students (and their parents) need to recognize that the reason tuition rates have grown so much is to offset the decline in State appropriations (which not coincidentally, started hitting hard in the early 2000s). Expenditures have gone up nowhere near what tuition has.

Which is all to say, the myth of “public higher education” is really just that; a myth. Yes, there is still some State funding for “public” universities, but it is an increasingly small percentage. Public universities are now much more dependent on tuition–just like private universities–than on State funds. And while that scale may have tipped just recently across the country as a whole, in Missouri it has been that way for quite some time.