Issue 1

The Space Between Markets and Hierarchies

The decision to pool production within a firm raises a fundamental tension for corporate law scholars. On the one hand, channeling activity into a centralized entity can economize on transaction costs by replacing the hassles of arms-length contracting with managerial discretion. Instead of attempting to write a complete contract to insulate against counterparty opportunism, firm managers retain the control necessary to make optimal decisions later—if and when a potential contingency arises. On the other hand, agency costs and production costs may be somewhat higher when business is conducted within a firm—because the activity is walled off from the relentless pricing pressure that comes with well-functioning markets. Recent work in the legal academy also shows how intra-firm activity can result in suboptimal capital structures for a given collection of assets. As the story goes, the precise location of a firm’s borders at any point in time will be the result of a mindful balancing between these competing effects.

Yet this account has always been somewhat misleading: there is space between markets and hierarchies. Business alliances, joint ventures, franchise agreements, and other structures offer firms a middle path between market exchange and unconditional firm control. Furthermore, the recent rise in business outsourcing transactions presents another intriguing context for studying hybrid organizational structures. Under many of these arrangements, assets (both physical and intangible) are legally owned by an offshore vendor, but the use of these assets is subject to partial control rights retained by the operational client.

This Article explores the growth of business outsourcing, how it works, and why two firms might logically enter into an outsourcing arrangement not only to cut production costs—but also to craft a sensible governance compromise. It also asks, more generally, whether increased diversity of organizational structures is starting to provide firms with a richer menu of strategies for sharing operational risk—in the same way that recent innovations in corporate finance and capital markets are dramatically altering ownership strategies on the right side of the balance sheet.

Invalid Forensic Science Testimony and Wrongful Convictions

This is the first study to explore the forensic science testimony by prosecution experts in the trials of innocent persons, all convicted of serious crimes, who were later exonerated by post-conviction DNA testing. Trial transcripts were sought for all 156 exonerees identified as having trial testimony by forensic analysts, of which 137 were located and reviewed. These trials most commonly included serological analysis and microscopic hair comparison, but some included bite mark, shoe print, soil, fiber, and fingerprint comparisons, and several included DNA testing. This study found that in the bulk of these trials of innocent defendants—82 cases or 60 percent—forensic analysts called by the prosecution provided invalid testimony at trial—that is, testimony with conclusions misstating empirical data or wholly unsupported by empirical data. This was not the testimony of a mere handful of analysts: this set of trials included invalid testimony by seventy-two forensic analysts called by the prosecution and employed by fifty-two laboratories, practices, or hospitals from twenty-five states. Unfortunately, the adversary system largely failed to police this invalid testimony. Defense counsel rarely cross-examined analysts concerning invalid testimony and rarely obtained experts of their own. In the few cases in which invalid forensic science was challenged, judges seldom provided relief. This evidence supports efforts to create scientific oversight mechanisms for reviewing forensic testimony and to develop clear scientific standards for report writing and testimony. The scientific community can promulgate standards to ensure the valid presentation of forensic science in criminal cases and thus the integrity and fairness of the criminal process.

Information Markets: Using Market Predictions to Make Today’s Decisions

Presidential betting markets predict election outcomes more
accurately than polls because of their ability to effectively aggregate information. Empirical research and theory indicates that the result extends to other contexts. Betting markets, more formally called information markets, provide accurate predictions about future product sales, box office receipts, and other future events. Moreover, market predictions generally outperform other prediction mechanisms. This paper argues that empirical research and theory indicates that we should use information markets’ predictive power to make administrative decisions. In addition, it presents a model information market designed to help policy makers evaluate policies prior to their implementation by providing policy makers information about the policies’ effects in the form of market predictions. To design such a market, it is necessary to determine how the market should pay off bettors when the agency does not implement a policy because the market predicts it will have an adverse effect. The problem is that bets pay off based on the outcome of an event, but when the policy makers decide not to implement a policy, the policy has no effect and thus it is unclear how to compensate bettors. This paper shows that through clever market design it is possible to return the market price of a bet, prior to an agency’s decision not to implement the policy on which the bet depends, without fear of market manipulation. Consequently, even in cases where using market predictions to make administrative decisions appears problematic, it is possible.

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