This module investigates fundamental law-and-economics principles underlying corporations and markets.
The module is an introduction to the principles and methods of the law and economics of corporations and markets. Law and Economics (also known as Economic Analysis of Law) has had a tremendous impact not only on legal scholarship, but also policy making and legal practice. Often, the legal framework governing corporations and markets is taken for granted, without a clear understanding of the underlying economic problems that legal rules seek to address, or the effects that they have on incentives, the operation of corporations, and market structure. This module will use economic analysis of law to explore how informational asymmetries between corporate managers, shareholders and creditors arise, when market concentration results in inefficiencies, and which regulatory responses to these market failures corporate law and competition law have developed. Without assuming any prior knowledge in economics, the module approaches these topics from both a legal and an economic perspective.
In the first part of the module, we will look at diverse tools of economic analysis. We will start with an introduction to basic economic concepts, such as supply and demand, rationality, utility maximisation and equilibrium, efficiency and market failures. The introductory part will conclude with an analysis of the Coase theorem and theories of incomplete contracting and property rights. The second part of the module will focus on the economic problems created by the use of the corporate form, in particular informational asymmetries and agency costs. We will address the notions of asset partitioning and entity shielding, examine the ex-ante and ex-post information problems and agency costs to which outside equity and debt give rise, and discuss regulatory and contractual solutions to these problems. The module will further introduce the concept of relational finance, examine the economic puzzle of secured debt, the fundamentals of credit risk, and the creditors’ bargain theory. Following this, we will explore the link between capital structure and firm value and discuss the capital asset pricing model. In the final part of the module, the focus will shift from informational asymmetries and agency costs to market structure and the welfare-reducing effects of monopolies and anticompetitive agreements. We will learn about the efficiency implications of monopolisation, cartels, and anticompetitive mergers and acquisitions.
No prior knowledge in economics or finance is required for this course. However, students enrolled in the module should be willing to engage with the law-and-economics and finance literature. Some seminars will also make use of (basic) algebra.
Aims of the Module:
- To provide students with a good understanding of the fundamental principles and methods of economic analysis of law;
- to provide a good understanding of the relationship between law and economics, in particular, how economic drivers influence decision-making, and how the law shapes incentives and economic outcomes;
- to develop the inter-disciplinary (law-and-economics) analytical thinking that is essential in much of legal practice and scholarship;
- to provide a good framework for analysing law-and-economics issues of corporations and markets that students may encounter in the future
Part 1: Basics
- Introduction to economic analysis of law and basic concepts in microeconomics
- Welfare economics, efficiency and market failures (information asymmetries, agency costs, adverse selection, market concentration)
- Transaction cost theory and the Coase theorem
- Incomplete contracting and property rights theory
Part 2: Corporations and financial markets
- Economic problems created by the use of the corporate form (in particular: outside equity and agency costs)
- Agency costs of debt
- Economics of secured debt
- Creditors’ bargain theory
- Capital structure and firm value
- Capital Asset Pricing Model
Part 3: Competitive markets and monopoly
- Monopolisation/abuse of dominance
- Cartels and anticompetitive agreements
- Mergers and anticompetitive transactions
The primary and secondary reading materials will be provided on enrolment via online module pages, once students have selected the course. No single textbook covers the range of topics relevant for this module. For preliminary reading materials, please see below (Suggestions for preliminary reading).
- Robert Cooter and Thomas Ulen, Law and Economics (6th ed., Berkley Law Books 2016)
- Richard Posner, Economic Analysis of Law (9th ed., Aspen Publishers 2014)
- Reinier Kraakman et al., The Anatomy of Corporate Law: A Comparative and Functional Approach (3rd ed., Oxford University Press 2017
- Ronald Coase, The Nature of the Firm, Economica, Vol. 4, No 16, (Nov., 1937), pp. 386-405
- Oliver E. Williamson, The Economics of Organization: The Transaction Cost Approach, The American Journal of Sociology, Vol. 87, No. 3 (Nov., 1981), pp. 548-577.
- Henry Hansmann, Reiner Kraakman and Richard Squire, Law and the Rise of the Firm, HARV. L. REV., Vol. 119, No. 5 (Mar., 2006), pp. 1333-1403.
- Michael C. Jensen and William H. Meckling, Theory of the Firm: Managerial Behavior, Agency Costs, and Ownership Structure, J. Fin. Econ., Vol. 3, No. 4, (1976), pp. 305-360.
- George A. Akerlof, The Market for “Lemons”: Quality Uncertainty and The Market Mechanism, Q. J. ECON., Vol. 84, No. 3 (Aug. 1970), pp. 488-500.
- Michael Spence, Job Market Signaling, Q. J. ECON., Vol. 87, No. 3 (Aug. 1973), pp. 355-374.
- Oliver Hart and John Moore, Incomplete Contracts and Renegotiation, Econometrica, Vol. 56, No. 4 (Jul., 1988), pp. 755-785
- Ian Ayres and Robert Gertner, Filling Gaps in Incomplete Contracts: An Economic Theory of Default Rules, YALE L.J., Vol. 99, No. 87, (1989-1990), pp. 87-130.
- George G. Triantis and Ronald J. Daniels, The Role of Debt in Interactive Corporate Governance, CAL. L. REV., Vol. 83, No. 4, (1995), pp. 1073-1113.
- Robert E. Scott, A Relational Theory of Secured Financing, COLUM. L. REV., Vol. 86, No. 5 (Jun., 1986), pp. 901-977.
- John Armour, The Law and Economics Debate about Secured Lending: Lessons for European Lawmaking, 5 ECFR 3 (2008).
|Credit value:||22.5 credits (225 learning hours)|
|Other Teachers:||Jonathan Chan; Andrew McLean; Graham Penn|
|Teaching Delivery:||Face to Face Seminar|
|Who may enrol:||LLM Students Only|
|Must not be taken with:||None|
|Qualifying module for:|
|Final Assessment:||24 Hour Take Home Examination (100%)|