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Priest and Klein argued in 1984 that, because of selection effects, the percentage of litigated cases won by plaintiffs will not vary with the legal standard. Many researchers thereafter concluded that one could not make valid inferences about the character of the law from the percentage of cases plaintiffs won, nor could one measure legal change by observing changes in that percentage. This article argues that, even taking selection effects into account, one may be able to make valid inferences from the percentage of plaintiff trial victories, because selection effects are partial. Therefore, although selection mutes changes in the plaintiff trial win rate, it does not make the win rate completely invariant to legal change. This article shows that inferences from litigated cases may be possible under the standard screening and signaling models of settlement, as well as under Priest and Klein’s original divergent-expectations model.

The passage of the Sarbanes-Oxley Act of 2002 was a watershed moment in U.S. financial history, and Section 404--which requires management assessment and auditor attestation of internal controls over financial reporting--is the most contested and expensive provision. This article reviews the administrative history of Section 404--namely, the experience of the U.S. Securities and Exchange Commission (\"SEC\") in implementing Section 404. Twenty years ago, when the SEC set out to implement Section 404 provisions as rules, the agency confronted a number of administrative questions of first impression, many of which were not fully appreciated until they surfaced again in subsequent statutes, such as the Dodd-Frank Act of 2010 and the JOBS Act of 2012. But it was the Sarbanes-Oxley Act--and Section 404 in particular--that really forced the agency to deliberate on thorny issues and prepared it for more storms to come. In this sense, Section 404 left behind an indelible administrative legacy and the SEC has become far more seasoned in dealing with mandated rulemakings, proceeding cautiously within its given parameters, considering costs and benefits of its rules and regulations, and understanding the dynamics of the notice-and-comment rulemaking process.

The purpose of this article is to raise a question regarding how the government ought to think about the efficiency or desirability of rules designed to regulate the market for capital. Although the author's immediate interest lies with the efficiency criterion for the US Securities and Exchange Commission's (SEC) rules for the US capital market, this question will be of interest to those concerned with global capital markets generally for at least two reasons. First, because the US capital market is a dominant market, the SEC's ability to successfully adopt rules and defend them from legal challenges (or failure to do so) will have consequences for not only US firms, but also major international firms. Secondly, the specific policy dilemma presented in this article, lying at the intersection of welfare economics and the political economy of regulation, will almost surely be an important concern for regulators of other capital markets as well

New York closing-statement data provide unique insight into settlement and selection. The distributions of settlements and adjudicated damages are remarkably similar, and the average settlement is very close to the average judgment. One interpretation is that selection effects may be small or nonexistent. Because existing litigation models all predict selection bias, we develop a simple, no-selection-bias model that is consistent with the data. Nevertheless, we show that the data can also be explained by generalized versions of screening, signaling, and Priest—Klein models.

This article explores the selection of disputes for litigation in a setting with two-sided incomplete information and correlated signals. The models analyzed here suggest that Priest and Klein’s conclusion that close cases are more likely to go to trial than extreme cases remains largely valid when their model is interpreted as involving correlated, two-sided incomplete information and is updated (i) to incorporate take-it-or-leave-it offers or the Chatterjee–Samuelson mechanism, (ii) to take into account the credibility of the plaintiff’s threat to go to trial, and (iii) to allow parties to make sophisticated, Bayesian inferences based on knowledge of the distribution of disputes. On the other hand, Priest and Klein’s prediction that the plaintiff will win 50% of litigated cases is sensitive to bargaining and parameter assumptions.

A long-standing view among legal scholars, political scientists, sociologists, and regulators posits that it is important for each regulatory agency to have a narrowly defined core mission and to focus on activities that are central to accomplishing it successfully. Although this view has no doctrinal foundation, rhetoric grounded on it crops up frequently in regulatory dialogues, especially in opposition to prospective agency regulations. The purpose of this Article is to formalize this \"core mission model\" of the administrative state and analyze its benefits, costs, and risks. An important starting point for the analysis is that, unlike a private corporation or a non-profit organization, a regulatory agency is not a free enterprise in a competitive market. Instead, as a \"creature of statutes,\" it stands in a principal—agent relationship with Congress, whose job in turn is to respond to society's various needs and problems, as they arise, by delegating responsibilities to new or existing agencies. Given this relationship, the core mission model has to be operationalized in one of two ways: either as an ex post prioritizing strategy (on the part of the agency) or as an ex ante delegating strategy (on the part of Congress). Both strategies, however, entail significant costs on the government and society. As an ex post prioritizing strategy, the model would promote selective attention on the part of the agency. While this strategy may reduce internal organizational costs for the agency (intra-agency coordination costs), it will also give use to regulatory gaps, which can lead to costly outcomes, such as crises or controversies. As an ex ante delegating strategy, the model will not be cost-effective if considerations based on conflicts among multiple agencies (interagency coordination costs) and/or wasteful duplication of government resources (duplicative costs) call for a deviation from the model, such as a conglomerate agency with a more intentional administrative design. Thus, a transaction-cost-based approach to agency jurisdiction design can at times counsel against subscription to the core mission model. For this reason, in order to maintain its relevance in today's regulatory dialogues, the core mission model should be recast under a more general framework which allows for discussions of these broader categories of social costs as well as considerations of alternative designs within each agency. The focus of the dialogues should likewise shift from how well a regulatory assignment is aligned with the agency's core mission to how to effectively cover all interests that need protection through regulation, without wasting government resources.

Administrative agencies must often engage in rulemaking in the presence of substantial factual uncertainty, mixed empirical findings, and untested claims. Given these challenges, a recent D.C. Circuit case, Business Roundtable v. SEC, 647 F.3d 1144 (D.C. Cir. 2011), is thought to have significantly raised the bar for rulemaking by independent agencies. Under the standard the court applied, many potentially efficient rules may not survive judicial review because agencies lack the hard data required with which to refute speculative comments. In response, this Essay suggests that agencies should take a more outcome-oriented approach to rulemaking by making use of \"options.\" In particular, when an agency is seeking to adopt a controversial rule against opposition from strong interest groups, it should strategically commit to an efficient ex post modification of the substance or the coverage of the rule and thereby partly relieve itself of its ex ante burden of justification. The agency's ex ante burden of justification should be reduced because if the rule comes coupled with an enforceable, efficient ex post modification scheme, its net expected benefit will necessarily be higher. Specifically, as compared to the case when the rule is adopted without such a scheme conferring option values, the economic cost of the rule will be reduced by the value of a contingent ex post repeal (under the \"real options\" approach) or the value of conditional ex post exemptions (under the \"menu-of-options\" approach). Reviewing courts, in turn, should recognize this higher net expected benefit resulting from the option value of the rule structure, and should therefore be more deferential to the agency's policy choice in such instances. As with the case of options generally, this approach is particularly valuable when the variance of the net expected benefit is high. This Essay discusses the theoretical framework of the suggested approach, its proper scope as well as potential pitfalls, and the simplest ways to implement it.

The Department of Transportation's announced plan to terminate all federal regulation of airline computer reservation systems (CRS) in 2004 is somewhat surprising in light of modern economic theories of regulation that highlight barriers to reform. This Article presents evidence on how CRS regulation affects the market for CRS services from the perspectives of both traditional and modern theories of regulation. We conclude that the announcement of a plan to terminate CRS regulations is consistent with traditional theories of regulation in which the government acts to maximize social welfare. We also demonstrate that the traditional approach to evaluating the merits of regulation, as sometimes applied, exhibits a bias toward rule retention by assuming that the relevant alternative to regulation is a state of laissez-faire. In fact, the relevant alternative is typically other forms of intervention by the government, such as antitrust enforcement, which poses as the government's strategic alternative for most if not all prior DOT regulation of CRS markets. Finally, we examine the practical relevance of modern theories of regulation for explaining the recent move towards deregulation. The occurrence of entry and technological change prior to CRS deregulation is of special interest from this perspective. The termination of CRS regulations is indeed consistent both with the traditional theory of deregulation in the public interest and with the modern interest group theory of deregulation in which deregulation is the ultimate conclusion of a process. Other modern theories of regulation appear not to explain the timing of reform in this instance. [PUBLICATION ABSTRACT]