The visible hand: Coordination functions of the regulatory state

Minnesota Law Review

Volumn 95, Issue 2, 2011, Pages 578-649

  Ahdieh, Robert B ^a  

^a EMORY UNIVERSITY   (United States)

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EID: 79955897022     PISSN: 00265535     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Article

References (481)

1. See generally Chrystia Freeland, The Credit Crunch According to Soros-Part I, FIN. TIMES, Jan. 31, 2009, available at http://www.ft.com/cms/s/0/ aaadcffe-ef37-11dd-bbb5-0000778fd2ac.html (discussing the events leading up to the current financial crisis and the impact of the crisis).
2. See, e.g., Robert E. Litan, The Internet Economy, FOREIGN POL'Y, Mar.-Apr. 2001, at 16 (suggesting that the Internet may save Americans $200 billion annually).
3. See LAWRENCE LESSIG, REMIX: MAKING ART AND COMMERCE THRIVE IN THE HYBRID ECONOMY 132-37 (2008) (describing the use of consumer data by Amazon.com, Google, and Netflix to generate incrementally improved search results and recommendations).
4. Cf. Steve Lohr, Computer Age Gains Respect of Economists, N. Y. TIMES, Apr. 14, 1999, at A1, available at 1999 WLNR 3005400 (highlighting the role of "electronic links with customers and suppliers" in speeding business expansion).
5. See Jay P. Kesan & Andres A. Gallo, Optimizing Regulation of Electronic Commerce, 72 U. CIN. L. REV. 1497, 1503 (2004) (proposing a mixed public-private regulatory regime to account for the unique problems posed by the Internet);
6. Philip J. Weiser, The Future of Internet Regulation, 43 U. C. DAVIS L. REV. 529, 536-37 (2009) (suggesting a "co-regulation" model for the Internet);
7. Timothy S. Wu, Cyberspace Sovereignty? - The Internet and the International System, 10 HARV. J. L. & TECH. 647, 649-56 (1997) (discussing and responding to scholars who question the ability to regulate the Internet).
8. U. S. CONST. art. I, § 8, cl. 8;
9. see also Jonathan Huebner, A Possible Declining Trend for Worldwide Innovation, 72 TECH. FORECASTING & SOC. CHANGE 980, 985 (2005) (noting a decline in the rate of new inventions).
10. Drew Thornley, Op-Ed., America Needs to Charge Feds with Improving Electrical Grid, S. F. EXAMINER, Sept. 21, 2010, http://www.sfexaminer.com/ opinions/columns/oped-contributors/america-needs-to-charge-feds-with-improving- electrical-grid-103503154.html.
11. See Keith Bradsher, A High-Speed Economy, N. Y. TIMES, Feb. 13, 2010, at B1, available at 2010 WLNR 3067192.
12. See Alan S. Blinder, Six Blunders en Route to a Crisis, N. Y. TIMES, Jan. 25, 2009, at BU7, available at 2009 WLNR 1435200.
13. ADAM SMITH, THE WEALTH OF NATIONS, BOOKS IV-V 1-12, 32 (Andrew Skinner ed., Penguin Books 1999) (1776).
14. In his Pulitzer Prize-winning account of what might be cast as a coordination function for managerial administration in modern business, historian Alfred Chandler highlighted just the type of counterpoint with the invisible hand that I aim to suggest in this Article.
15. See ALFRED D. CHANDLER, JR., THE VISIBLE HAND: THE MANAGERIAL REVOLUTION IN AMERICAN BUSINESS 1 (1977).
16. SMITH, supra note 10, at 32.
17. See infra Parts II. C, and III. B.1.
18. See ROBERT W. CRANDALL, BROOKINGS INST., EXTENDING DEREGULATION: MAKE THE U. S. ECONOMY MORE EFFICIENT (2007), available at http://www.brookings.edu/~/ media/Files/Projects/Opportunity08/PB-Deregulation-Crandall.pdf (prepared for the Brookings Institute's "Opportunity 08" project).
19. Cf. STEPHEN G. BREYER, REGULATION AND ITS REFORM 15-35 (1982) (discussing "traditional" reasons for regulation such as control of monopolies, limits on rent seeking, and "compensating for externalities");
20. Jon D. Hanson & Kyle D. Logue, The Cost of Cigarettes: The Economic Case for Ex Post Incentive-Based Regulation, 107 YALE L. J. 1163, 1253 (1998) (summarizing one argument for requiring smokers to internalize the social costs of smoking).
21. See infra Part III. I do not mean to suggest that coordination has displaced the worries behind our regulatory interventions in areas including environmental law, workplace safety, and securities trading. The conflicting incentives that motivate regulation in these spheres are no less important today than a century ago. The dynamics at work in the financial markets, the Internet, the encouragement of innovation, and elsewhere simply make coordination a crucial concern as well. I likewise appreciate the mix of coordination and conflict that will often be present. The excess risk taking that helped to produce the recent financial crisis, for example, is properly understood as grounded in conflicting interests and attendant negative externalities, notwithstanding the fact that the crisis it generated was defined by a failure of coordination.
22. See infra notes 34-38 and accompanying text.
23. See infra notes 60-81 and accompanying text.
24. See, e.g., Richard H. McAdams, Beyond the Prisoners' Dilemma: Coordination, Game Theory, and Law, 82 S. CAL. L. REV. 209, 214 (2009).
25. For a concise description of the Prisoner's Dilemma, see WILLIAM POUNDSTONE, PRISONER'S DILEMMA 103-05 (1992).
26. For a description of coordination games and their differences from Prisoner's Dilemma games, see McAdams, supra note 18, at 218-24.
27. See Edward L. Rubin, The New Legal Process, the Synthesis of Discourse, and the Microanalysis of Institutions, 109 HARV. L. REV. 1393, 1425-26 (1996) (emphasizing the need for "microanalysis of institutions" in seeking to properly understand social and economic phenomena of interest to legal scholars).
28. See infra III. B.1.
29. See infra note 191 and accompanying text. A proper appreciation of the coordination functions of regulation likewise counsels reconsideration of the "market participant" exemption in our Dormant Commerce Clause jurisprudence.
30. See generally Dan T. Coenen, Untangling the Market-Participant Exemption to the Dormant Commerce Clause, 88 MICH. L. REV. 395, 398-400 (1989);
31. infra notes 260-61 and accompanying text.
32. ADMINISTRATION OF BARACK H. OBAMA, 2009 INAUGURAL ADDRESS (Jan. 20, 2009), available at http://www.gpoaccess.gov/presdocs/2009/DCPD200900001.pdf. As a popular newsmagazine framed recent debates over regulatory reform: "All of this is unfolding in an economy that can no longer be understood, even in passing, as the Great Society vs. the Gipper."
33. John Meacham & Evan Thomas, We Are All Socialists Now, NEWSWEEK, Feb. 16, 2009, at 23, available at 2009 WLNR 2549898.
34. See, e.g., Edmund L. Andrews & Vikas Bajaj, Amid Fury, U. S. Is Set to Curb Executives' Pay After Bailouts, N. Y. TIMES, Feb. 4, 2009, at A1, available at 2009 WLNR 2059127 (discussing the Obama Administration's response to excessive executive pay);
35. Beth Healy, Madoff Takes Step Toward Guilty Plea, BOS. GLOBE, Mar. 7, 2009, at 5, available at 2009 WLNR 4389072. This is not to suggest that dynamics of defection are irrelevant to an understanding of financial crises. as noted above, the payment of massive bonuses, fraudulent behavior, and high-risk lending are all incidents of defection from socially optimal equilibria. Particularly the last of these-risky lending and investment practices by financial sector firms-can be understood to have been an important impetus behind the recent financial crisis. More broadly, in fact, patterns of defection may often be ex ante factors in prompting financial crises. For the reasons outlined above, however, the ex post alleviation of such crises turns on a dynamic of coordination.
36. See Bianna Golodryga, Financial Crisis, Bailout Has Ripples Past Wall Street, ABCNEWS. COM, Sept. 28, 2008, http://abcnews.go.com/GMA/story? id=5902773 (quoting Bush Administration spokesperson Dana Perino: "If no one in the financial community trusts each other to lend money, then we're going to have a complete and total financial collapse");
37. see also Bob Davis & Carrick Mollencamp, Financial Protectionism is Latest Threat to Global Recovery, WALL ST. J., Feb. 2, 2009, at A2 (noting the retreat of various national banking communities into defensive stances in the aftermath of the 2008 financial crisis).
38. See Vikas Bajaj, Lending Locked, U. S. Tries a Trillion-Dollar Key, N. Y. TIMES, Feb. 20, 2009, at A1, available at 2009 WLNR 3328102 ("Most banks no longer hold the loans they make.... Instead, the loans are bundled into securities that are sold to investors, a process known as securitization. ").
39. Id.
40. See Golodryga, supra note 25.
41. Scholars have explored this dynamic of interlinkage and resulting interdependency in the financial markets as a form of "systemic risk."
42. See Steven L. Schwarcz, Systemic Risk, 97 GEO. L. J. 193, 198-201 (2008).
43. This is the essential structure of bank finance in a system of fractional reserve banking. See Henry N. Butler & Jonathan R. Macey, The Myth of Competition in the Dual Banking System, 73 CORNELL L. REV. 677, 694-96 (1988);
44. Mark J. Roe, Foundations of Corporate Finance: The 1906 Pacification of the Insurance Industry, 93 COLUM. L. REV. 639, 647 n. 22 (1993);
45. Albert J. Boro, Jr., Comment, Banking Disclosure Regimes for Regulating Speculative Behavior, 74 CALIF. L. REV. 431, 434-35 (1986).
46. See Douglas W. Diamond & Philip H. Dybvig, Bank Runs, Deposit Insurance, and Liquidity, 91 J. POL. ECON. 401, 402 (1983) ("This vulnerability occurs because there are multiple equilibria with differing levels of confidence."). Confirming the mistaken emphasis on the Prisoner's Dilemma versus coordination games suggested infra Part II, bank runs have often been mischaracterized as Prisoner's Dilemma games by legal scholars.
47. See e.g., McAdams, supra note 18, at 216-17.
48. See Diamond & Dybvig, supra note 31, at 403.
49. See id. at 403-04 (noting the genesis of bank runs is "a shift in expectations").
50. See Jane Kamensky, Boom and Bust: It's the American Way, L. A. TIMES, July 20, 2008, at 1, available at 2008 WLNR 13528841 (noting the corrosive effects of an expanding "circle of mistrust" in recent bank failures);
51. Robin Sidel, The Week that Shook Wall Street: Inside the Bailout of Bear Stearns, WALL ST. J., Mar. 18, 2008, at A1
52. (highlighting how the spread of "negative rumors" caused investors to withdraw funds from Bear Stearns and erode its otherwise strong capital reserve).
53. See Daniel Indiviglio, Another Shot at the Credit Crunch, FORBES. COM, Mar. 3, 2009, http://www.forbes.com/2009/03/03/talf-fed-lending-business- washington-talf-print.html (noting the creation of a government program to relieve the credit crunch).
54. See Russell Cooper & Andrew John, Coordinating Coordination Failures in Keynesian Models, 103 Q. J. ECON. 441, 447 (1988) ("[H]ighlight[ing] the connection between strategic complementarity and multiplicity of equilibria.");
55. Paul R. Masson, Multiple Equilibria, Contagion, and the Emerging Market Crises 5-11 (Int'l Monetary Fund, IMF Working Paper WP/99/164, 1999) (discussing three distinct accounts of multiple equilibria in financial markets);
56. see also id. at 3 ("[M]odels with multiple equilibria... square better with the stylized facts of global financial markets."). The same might be said of the dynamics at work among creditors in the face of a potential bankruptcy.
57. See McAdams, supra note 18, at 218 n. 32.
58. See Masson, supra note 36, at 6 ("[I]f each bank believes that all other banks will stop lending, all banks will stop lending."
59. (quoting Jeffrey Sachs, Theoretical Issues in International Borrowing 32 (Princeton Studies in Int'l Fin. Working Paper No. 54, 1984))).
60. Some have characterized financial crises as arising out of "strategic complementarities"-a dynamic of positive feedback, in which payoffs arise from choices that match those of other market participants.
61. See Jeremy I. Bulow et al., Multimarket Oligopoly: Strategic Substitutes and Complements, 93 J. POL. ECON. 488, 491-97 (1985);
62. Cooper & John, supra note 36, at 447.
63. The same holds true for accounts of the financial markets. Compare Robert B. Ahdieh, Law's Signal: A Cueing Theory of Law in Market Transition, 77 S. CAL. L. REV. 215, 223-25 (2004) (discussing how financial markets are shaped by "network externalities")
64. and Michael L. Katz & Carl Shapiro, Network Externalities, Competition, and Compatibility, 75 AM. ECON. REV. 424, 424 (1985) (same), with
65. JOHN MAYNARD KEYNES, THE GENERAL THEORY OF EMPLOYMENT INTEREST AND MONEY 156 (1936) (comparing markets to a type of beauty contest where each observer's assessment is defined by that of her counterparts). Two distinct, but related, effects of financial crises are grounded in nonrational "herd" behavior, by which markets move up and down dramatically based on small movements irrationally mimicked by others.
66. See Christopher Avery & Peter Zemsky, Multidimensional Uncertainty and Herd Behavior in Financial Markets, 88 AM. ECON. REV. 724, 724 (1998);
67. V. V. Chari & Patrick J. Kehoe, Financial Crises as Herds: Overturning the Critiques, 119 J. ECON. THEORY 128, 129-30 (2004);
68. cf. Paul Krugman, A Model of Balance-of-Payment Crises, 11 J. MONEY CREDIT & BANKING 311, 319 (1979) (noting that balanceof-payments crises tend to occur when "speculators" as a group act in response to a belief that the government is about to abandon its fixed exchange rate). Whether it is the rational dynamic of strategic complementarity or irrational patterns of herd behavior, both accounts rest on a dynamic in which market returns depend on the coordination of investors around one equilibrium or another.
69. Maurice Obstfeld, by way of example, has modeled currency crises as exhibiting bank-run-style multiple equilibria, in which speculators do or do not attack a currency, depending on their expectations of other speculators' likely behavior.
70. See Maurice Obstfeld, Models of Currency Crises with Self-Fulfilling Features, 40 EUR. ECON. REV. 1037, 1039 (1996).
71. Other accounts of coordination in the financial markets might also be offered. Hayek's theory of the function of price is a story of economic coordination.
72. See FRIEDRICH A. HAYEK, THE CONSTITUTION OF LIBERTY 227-30 (1960) (discussing how price is dependent upon several factors working together). The Austrian school's account of money is likewise an account of coordination at its foundation.
73. See MURRAY N. ROTHBARD, THE LOGIC OF ACTION I: METHOD, MONEY, AND THE AUSTRIAN SCHOOL 211-12 (1997).
74. The effective valuation of money thus necessitates some dynamic of coordination. More concrete dynamics of coordination might be seen in the creation and the evolution of financial market infrastructure.
75. See Ahdieh, supra note 38, at 223-29. Recent debates over the wave of linkages among exchanges and securities trading systems, as well as some incidents of full-fledged merger, can be understood in this light.
76. See, e.g., Ioannis Kokkoris & Rodrigo Olivares-Caminal, Lessons from the Recent Stock Exchange Merger Activity, 4 J. COMPETITION L. & ECON. 837, 855 (2008) (discussing the issues of competition-concern and coordination-related matters). The same is true of discussions over the growing practice of the duallisting of stocks on multiple exchanges.
77. See Dana T. Ackerley II & Eric J. Pan, Dual-Listing Securities in Europe and the United States, in THE COMPLETE GUIDE TO LISTING ON THE LONDON STOCK EXCHANGE 7 (2002) ("The coordination between the U. S. and the non-U. S. tranches of the offering must be carefully worked out...."). Even the heated response to the Securities and Exchange Commission's moves toward harmonization of disclosure standards might be seen to implicate the coordination dynamic at work in the securities market structure.
78. See Patrick E. Hopkins et al., Response to the SEC Release: Acceptance from Foreign Private Issuers of Financial Statements Prepared in Accordance with International Financial Reporting Standards Without Reconciliation to U. S. GAAP File No. S7-13-07, 2222 ACCT. HORIZONS 223, 223-33 (2008) (critiquing the SEC's proposal to accept financial statements from foreign private issuers prepared in accordance with International Financial Reporting Standards (IFRS), without reconciling such statements with U. S. GAAP).
79. See generally Sharon Eisner Gillett & Mitchell Kapor, The Self-Governing Internet: Coordination by Design, in COORDINATION OF THE INTERNET 3 (Brian Kahin & James Keller eds., 1997), available at http://ccs.mit.edu/papers/CCSWP197/CCSWP197.html.
80. See id. at 11 (stating that protocol standards must be agreed upon if they are to be operable).
81. See id. at 12-13 (describing IETF's role in developing Internet protocols and standardizing existing practices, particularly as to interoperability questions). The IETF's ongoing coordinative role might be usefully contrasted with the episodic pattern of regulatory coordination commonly at work in the financial markets. In the latter case, a coordination role for regulation becomes especially critical when the market shifts to the suboptimal equilibrium of diminished lending and investment.
82. See supra notes 32-37 and accompanying text. In many coordination settings, however, from the Internet to the encouragement of innovation, the coordination role of regulation is more likely to be ongoing.
83. See Kevin Werbach, The Centripetal Network: How the Internet Holds Itself Together, and the Forces Tearing It Apart, 42 U. C. DAVIS L. REV. 343, 346 n. 11 (2008)
84. ("Backbones are the Internet's long-distance links between local access networks.").
85. See generally id. (discussing the centralization/decentralization debate surrounding the Internet backbone). Operation of the Internet thus depends on coordination across an array of data networks and core routers, and hence among the various governmental, commercial, and academic institutions that own or control those systems.
86. See Judith A. Endejan, Cable's "Other Hat"-Providing Telecommunications Services, in CABLE TELEVISION LAW 1999, at 291, 339-47 (PLI Patents, Copyrights, Trademarks, & Literary Prop., Course Handbook Ser. No. G0-0003A, 1999).
87. See Werbach, supra note 44, at 399-400.
88. See id. at 345-46.
89. The growing influence of the International Organization for Standardization (ISO) helps to highlight as much.
90. See INT'L ORG. FOR STANDARDIZATION, ISO IN BRIEF 2-3 (2008), available at http://www.iso.org/iso/isoinbrief-2008.pdf.
91. See Saul Hansell, Connecting Gadgets Is Theme at Annual Show, N. Y. TIMES, Jan. 7, 2009, at B7, available at 2009 WLNR 349655.
92. See Joel Johnson, HDTV Guidebook, POPULAR MECHANICS, Jan. 2006, at 32, 32-34.
93. Cf. T. G. Zimmerman, Wireless Networked Digital Devices: A New Paradigm for Computing and Communication, 38 IBM SYSTEMS J. 566, 571-73 (1999), available at http://ieeexplore.ieee.org/stamp/stamp. jsp?tp=&arnumber= 5387057&tag=1 (discussing the ability of wireless technologies to share information).
94. See Laura Evans, Monitoring Technology in the American Workplace: Would Adopting English Privacy Standards Better Balance Employee Privacy and Productivity?, 95 CALIF. L. REV. 1115, 1148 n. 242 (2007) (noting the extended standards battle between Blu-ray and HD DVD standards).
95. See Peter Sayer, ISO Confirms Approval of OOXML, Gives Two Months to Appeal, COMPUTERWORLD (Apr. 2, 2008), http://www.computerworld.com/s/article/ print/9074358/ISO-confirms-approval-of-OOXML-gives-two-months-to-appeal? taxonomyName=Security&taxonomyId=1.
96. See Christopher S. Gibson, Globalization and the Technology Standards Game: Balancing Concerns of Protectionism and Intellectual Property in International Standards, 22 BERKELEY TECH. L. J. 1403, 1404-05 (2007).
97. See Troy A. Paredes, A Systems Approach to Corporate Governance Reform: Why Importing U. S. Corporate Law Isn't the Answer, 45 WM. & MARY L. REV. 1055, 1097 (2004).
98. See, e.g., Daniel A. Farber, Revitalizing Regulation, 91 MICH. L. REV. 1278, 1290-93 (1993).
99. Data collected by the U. S. Census Bureau on public school finances is suggestive.
100. See Preston C. Green, III et al., Achieving Racial Equal Educational Opportunity Through School Finance Litigation, 4 STAN. J. C. R. & C. L. 283, 302 n. 130 (2008).
101. See Matthew L. Wald, Wind Energy Bumps into Power Grid's Limits, N. Y. TIMES, Aug. 27, 2008, at A1, available at 2008 WLNA 16147962;
102. Matthew Daly, Stimulus Bill Would Boost NW Grid, Wind Energy, SEATTLE TIMES, Feb. 1, 2009, http://seattletimes.nwsource.com/html/localnews/2008695421- apstimulusbpa.html.
103. See Daly, supra note 58;
104. David M. Herszenhorn, Even After the Deal, Tinkering Goes On, N. Y. TIMES, Feb. 13, 2009, at A20, available at 2009 WLNR 2851263.
105. See Nicole B. Ellison et al., Social Network Sites and Society: Current Trends and Future Possibilities, INTERACTIONS, Jan.-Feb. 2009, at 6, 6.
106. See Curtis J. Milhaupt, The Market for Innovation in the United States and Japan: Venture Capital and the Comparative Corporate Governance Debate, 91 NW. U. L. REV. 865, 865-67 (1997).
107. See MICHAEL HELLER, THE GRIDLOCK ECONOMY: HOW TOO MUCH OWNERSHIP WRECKS MARKETS, STOPS INNOVATION, AND COSTS LIVES 6 (2008) (arguing that patent laws for medical research reduce collaboration and block the development of potentially helpful drugs and yet no one complains);
108. Michael A. Heller & Rebecca S. Eisenberg, Can Patents Deter Innovation? The Anticommons in Biomedical Research, 280 SCIENCE 698, 698-701 (1998);
109. Robert E. Thomas, Debugging Software Patents: Increasing Innovation and Reducing Uncertainty in the Judicial Reform of Software Patent Law, 25 SANTA CLARA COMPUTER & HIGH TECH. L. J. 191, 213 (2008) (describing "patent thickets" in computer software development); infra notes 74-75 and accompanying text.
110. Cf. HELLER, supra note 62, at 23 (explaining the difficulty in fixing problems without first creating a consensus on certain aspects of the problems).
111. More precisely, it is the price function that is ordinarily understood as the mechanism of efficient coordination in a market economy.
112. See GEORGE J. STIGLER, THE THEORY OF PRICE 85 (3d ed. 1966).
113. SMITH, supra note 10.
114. See, e.g., HELLER, supra note 62, at 6.
115. See id.
116. The authors thus variously suggest a need to reassess the place of the market incentives and the role of the individual, to reconsider the potential impact of spontaneous action and the nature of production, and to recognize the increasing role of knowledge and information in the generation of wealth. See infra notes 60-80 and accompanying text.
117. HELLER, supra note 62, at 18.
118. See id. at 18-19.
119. See id.
120. See id.
121. See id. at 19-20.
122. See id. at 49-50.
123. See id. at 49-52.
124. See id. at 19-20.
125. See id. at 8-9.
126. See id. at 81.
127. See id. at 13-16, 19-20.
128. See id. at 2.
129. For an amusing example
130. see id. at 6-7.
131. See id. at 2.
132. YOCHAI BENKLER, THE WEALTH OF NETWORKS: HOW SOCIAL PRODUCTION TRANSFORMS MARKETS AND FREEDOM (2006).
133. See id. at 62.
134. See id. at 3.
135. See id. at 105-06.
136. See id.
137. See id.
138. See id.
139. See id. at 70-74.
140. See Jim Giles, Internet Encyclopedias Go Head to Head: Jimmy Wales' Wikipedia Comes Close to Brittanica in Terms of the Accuracy of its Science Entries, a Nature Investigation Finds, NATURE, Dec. 15, 2005, at 900, 900-01.
141. See generally H. Maura Lendon, The Linux Revolution, 15 INTELL. PROP. J. 143, 148, 156-57 (2000) (noting that the development of Linux as Open Source software was intended to take advantage of "hundreds of users providing feedback, suggestions for improvement and new code to fix bugs and enhance the program, " and to use "continual 'peer review'" to improve its quality).
142. GNU General Public License: Version 2, LINUX ONLINE (June 1991), http://www.linux.org/info/gnu.html [hereinafter LINUX].
143. See generally FACEBOOK (2010), http://www.facebook.com/;
144. FLICKR (2010), http://www.flickr.com/;
145. TWITTER (2010), http://twitter.com/.
146. See LESSIG, supra note 3, at 18-19.
147. See id. at 28-35.
148. See id. at 28.
149. A further dimension of coordination might be seen in Lessig's arguments about the ways in which the economics of business is changing, including through technologies that rely on freely contributed consumer data to generate value. Think here of Google's PageRank system, and of Amazon.com's and Netflix's use of customer purchases (and page views) to improve the quality of their recommendations.
150. See id. at 122-28.
151. CLAY SHIRKY, HERE COMES EVERYBODY: THE POWER OF ORGANIZING WITHOUT ORGANIZATIONS (2008).
152. Id. Shirky describes, for example, the striking use of so-called flash mobs in antigovernment protests in Belarus.
153. See id. at 166-71. Using text messaging and weblogs, such protests are quickly brought together, with little or no advance planning. In this way, they permit protest, while allowing organizers to more easily avoid detection.
154. See id.
155. RICHARD H. THALER & CASS R. SUNSTEIN, NUDGE: IMPROVING DECISIONS ABOUT HEALTH, WEALTH, AND HAPPINESS (2008).
156. See id. at 4-6.
157. See generally BENKLER, supra note 83 (describing the important of coordination);
158. HELLER, supra note 62 (same);
159. LESSIG, supra note 3 (same);
160. SHIRKY, supra note 99 (same).
161. My point is not that these accounts all collapse into the same story; nor do I suggest that coordination explains everything that the authors observe. Rather, I simply suggest that each of the works' divergent subjects and distinct conclusions have at their hearts a dynamic of coordination, which surely implies something.
162. See, e.g., LINUX, supra note 93 (describing the "threat" posed by software patents).
163. The important caveat to this lies in theories of the firm.
164. See Edward B. Rock & Michael L. Wachter, Islands of Conscious Power: Law, Norms, and the Self-Governing Corporation, 149 U. PA. L. REV. 1619, 1621-22 (2001).
165. See generally R. H. Coase, The Nature of the Firm, 4 ECONOMICA 386, 386 (1937).
166. The firm constitutes a counterpoint to market-based coordination by way of price. Cf. CHANDLER, supra note 11, at 490.
167. To be sure, some have recognized as much. I have already noted the work of Richard McAdams.
168. See supra note 18. In After the Rights Revolution, Sunstein highlights the role of regulation in responding not only to collective action problems, but to coordination problems as well.
169. See CASS R. SUNSTEIN, AFTER THE RIGHTS REVOLUTION: RECONCEIVING THE REGULATORY STATE 51-52 (1990). Notably, though, he places relatively little emphasis on the latter functions. Further, he continues to emphasize the coercive role of regulation in those settings.
170. Compare id. ("[C]oercion has an often overlooked facilitative function. "), with infra Part III. A.1 (highlighting the role of regulation in shaping expectations rather than incentives).
171. See DOUGLAS G. BAIRD ET AL., GAME THEORY AND THE LAW 45, 62 (1994);
172. JÜRGEN EICHBERGER, GAME THEORY FOR ECONOMISTS 1 (1993) (noting the reliance of game theory on rational players). From the opposite direction, I fully appreciate the relative simplicity of the 2x2 games on which I rely. For the purposes intended herein, however, a bracketing of additional players, mixed strategies, sequential versus simultaneous plays, and evolutionary patterns may actually be most effective.
173. See McAdams, supra note 18, at 211.
174. See McAdams, supra note 18, at 214-15.
175. See ROGER B. MYERSON, GAME THEORY: ANALYSIS OF CONFLICT 97 (1991) (introducing the Prisoner's Dilemma).
176. For a more complete analysis, see AVINASH DIXIT & SUSAN SKEATH, GAMES OF STRATEGY 256-57 (1999).
177. See Susan Block-Lieb, Congress' Temptation to Defect: A Political and Economic Theory of Legislative Resolutions to Financial Common Pool Problems, 39 ARIZ. L. REV. 801, 813 (1997);
178. cf. Ronald J. Gilson & Robert H. Mnookin, Disputing Through Agents: Cooperation and Conflict Between Lawyers in Litigation, 94 COLUM. L. REV. 509, 514-18 (1994) (discussing defection within a Prisoner's Dilemma in the context of litigation).
179. See, e.g., Block-Lieb, supra note 111, at 818-19.
180. See, e.g., Gideon Doron, Administrative Regulation of an Industry: The Cigarette Case, 39 PUB. ADMIN. REV. 163, 165-67 (1979) (describing regulation of defection in oligopolist cigarette advertising);
181. see also Kent Greenfield, Using Behavioral Economics to Show the Power and Efficiency of Corporate Law as Regulatory Tool, 35 U. C. DAVIS L. REV. 581, 599 (2002) (noting the necessity of regulation to prevent defection-based market failures).
182. See, e.g., ROBERT O. KEOHANE, AFTER HEGEMONY: COLLABORATION AND DISCORD IN THE WORLD POLITICAL ECONOMY 67-69 (1984);
183. John K. Setear, An Iterative Perspective on Treaties: A Synthesis of International Relations Theory and International Law, 37 HARV. INT'L L. J. 139, 178 n. 160 (1996). (Pubitemid 126393969)
184. See Doron, supra note 113, at 167;
185. Greenfield, supra note 113, at 599;
186. cf. Eyal Zamir, The Efficiency of Paternalism, 84 VA. L. REV. 229, 248-52 (1998) (arguing that "systematic deviations from the rational-maximizer model" undermine the position of principled antipaternalism). (Pubitemid 128443481)
187. See MANCUR OLSON, JR., THE LOGIC OF COLLECTIVE ACTION 14 n. 21, 14-15 (1971).
188. Id.
189. See David W. Leebron, Games Corporations Play: A Theory of Tender Offers, 61 N. Y. U. L. REV. 153, 188-90 (1986)
190. (describing the tender offer problem in terms of free riders and the Prisoner's Dilemma);
191. McAdams, supra note 18, at 215 n. 24;
192. David Schmidtz, Contracts and Public Goods, 10 HARV. J. L. & PUB. POL'Y 475, 479-83 (1987).
193. Free-rider dynamics generally have similar effects.
194. See Schmidtz, supra note 118, at 475-82.
195. See Garrett Hardin, The Tragedy of the Commons, 162 SCIENCE 1243, 1244 (1968).
196. Hanoch Dagan and Michael Heller describe commons property as "the axiomatic example of a prisoner's dilemma." Hanoch Dagan & Michael A. Heller, The Liberal Commons, 110 YALE L. J. 549, 555 (2001);
197. see also THOMAS C. SCHELLING, MICROMOTIVES AND MACROBEHAVIOR 110-15 (1978) (describing the tragedy of the commons as a Prisoner's Dilemma);
198. Lee Anne Fennell, Common Interest Tragedies, 98 NW. U. L. REV. 907, 944 (2004);
199. Robert W. Hillman, Business Partners as Fiduciaries: Reflections on the Limits of Doctrine, 22 CARDOZO L. REV. 51, 74 n. 65 (2000);
200. Anatol Rapoport, Prisoner's Dilemma, in THE NEW PALGRAVE: GAME THEORY 199, 204 (John Eatwell et al. eds., 1989) (noting that the Prisoner's Dilemma becomes a version of the so-called tragedy of the commons when generalized to more than two participants).
201. See Hardin, supra note 120, at 1244.
202. Id.
203. Id.
204. See, e.g., Lisa Schenck, Climate Change "Crisis"-Struggling for Worldwide Collective Action, COLO. J. INT'L ENVTL. L. & POL'Y 319, 335 (2008) (discussing climate change as a defection problem);
205. see also Leebron, supra note 118, at 188-90 (describing defection in the context of tender offers);
206. Schmidtz, supra note 118, at 479-83 (considering defection from investment in informational public goods);
207. cf. Block-Lieb, supra note 111, at 810-20 (discussing defection in common pool problems).
208. Cf. OLSON, supra note 116, at 2 ("[R]ational, self-interested individuals will not act to achieve their common or group interests.").
209. See Schenck, supra note 124, at 335-36.
210. Individuals and institutions are motivated to deviate from optimal equilibria in circumstances cognizable as a Prisoner's Dilemma. See supra notes 111-15 and accompanying text. Negative externalities are similarly grounded in Prisoner's Dilemma stories of defection.
211. See Fennell, supra note 120, at 944; Amir N. Licht, Games Commissions Play: 2x2 Games of International Securities Regulation, 24 YALE J. INT'L L. 61, 88-89 (1999).
212. Even patterns of information asymmetry and natural monopoly have been cast as species of Prisoner's Dilemmas.
213. See, e.g., Robert S. Adler & Elliot M. Silverstein, When David Meets Goliath: Dealing with Power Differentials in Negotiations, 5 HARV. NEGOT. L. REV. 1, 68 (2000) (describing a Prisoner's Dilemma dynamic in information disclosure);
214. John Shepard Wiley Jr., Reciprocal Altruism as a Felony: Antitrust and the Prisoner's Dilemma, 86 MICH. L. REV. 1906, 1914-20 (1988) (analyzing cartels using the Prisoner's Dilemma);
215. John Simpson & Abraham L. Wickelgren, Bundled Discounts, Leverage Theory, and Downstream Competition, 9 AM. L. & ECON. REV. 370, 370 (2007) (linking dynamics at work in monopoly settings to the Prisoner's Dilemma). "Market for lemons" problems are especially suitable to a Prisoner's Dilemma frame of analysis.
216. See George A. Akerlof, The Market for "Lemons": Quality Uncertainty and the Market Mechanism, 84 Q. J. ECON. 488, 489 (1970).
217. See supra note 115 and accompanying text.
218. See JOHN MAYNARD SMITH & EÖRS SZATHMÁRY, THE MAJOR TRANSITIONS IN EVOLUTION 261-62 (1995).
219. See id.
220. See, e.g., W. Bradley Wendel, Civil Obedience, 104 COLUM. L. REV. 363, 378 n. 70 (2004).
221. See Vincent P. Crawford & Hans Haller, Learning How to Cooperate: Optimal Play in Repeated Coordination Games, 58 ECONOMETRICA 571, 571-72 (1990).
222. See THOMAS C. SCHELLING, THE STRATEGY OF CONFLICT 54-56 (1960).
223. Thomas Schelling first described the Meeting Place game decades before invention of the mobile phone. Today, one might simply imagine having an iPhone in New York, but being unable to get a signal from AT&T.
224. See Mike Zapler, Wireless Data Logjam a Looming Crisis, SAN JOSE MERCURY NEWS, Feb. 7, 2010, at 1A, available at 2010 WLNR 2676654.
225. SCHELLING, supra note 133, at 54;
226. see also Diamond & Dybvig, supra note 31, at 404 ("In contrast, a bank run in our model is caused by a shift in expectations....").
227. See Judith Mehta et al., The Nature of Salience: An Experimental Investigation of Pure Coordination Games, 84 AM. ECON. REV. 658, 658 (1994).
228. Throughout this Article, I state the operative game payoffs as {Row Player, Column Player}, with Row Player's choices demarcated on the vertical axis and Column Player's choices on the horizontal axis.
229. Where relevant drivers have no preference between driving on the right or left side of the road, that choice is likewise captured by this set of payoffs.
230. Grand Central Station, of course, figured prominently in Schelling's experimental studies of coordination.
231. See SCHELLING, supra note 133, at 55 n. 1.
232. See infra Part II. C.
233. As I will describe below, see infra Part III. B.4, besides the coordination settings described in Part I, coordination-oriented regulatory approaches may also have application in those settings in which the Prisoner's Dilemma is played in indefinite repeat plays. In the latter circumstances, the Prisoner's Dilemma can essentially be understood to be transmuted into a coordination game.
234. Cf. Peter Huber, Competition, Conglomerates, and the Evolution of Cooperation, 93 YALE L. J. 1147, 1151 (1984) (arguing that the marketplace setting differs from the classic formulation of the Prisoner's Dilemma because a firm can alter its strategic choice while it is being made in response to the behavior of other firms).
235. See, e.g., Robert W. Crandall & J. Gregory Sidak, Is Structural Separation of Incumbent Local Exchange Carriers Necessary for Competition?, 19 YALE J. ON REG. 335, 339-40 (2002) (criticizing proposed telecommunications regulation as based upon the false premise that market failures are the result of anticompetitive behavior by incumbent local exchange carriers rather than a problem of integration and coordination);
236. Schwarcz, supra note 29, at 196-210 (arguing that improper regulation of financial markets arises from a failure to understand the nature and sources of systemic risk).
237. See generally Kesan & Gallo, supra note 5, at 1502-05 (discussing the need to understand the operation of markets on the Internet in order to design effective Internet regulation).
238. See, e.g., Cynthia A. Williams, Civil Society Initiatives and "Soft Law" in the Oil and Gas Industry, 36 N. Y. U. J. INT'L L. & POL. 457, 494-96 (2004)
239. (advocating voluntary environmental regulation of the oil and gas industry given the growth of a global coordination economy).
240. See supra notes 113-15 and accompanying text; cf. Robert B. Ahdieh, From Federalism to Intersystemic Governance: The Changing Nature of Modern Jurisdiction, 57 EMORY L. J. 1, 18-21 (2007) (listing multiple authors who have turned to a coordination model in rejecting traditional regulatory models);
241. McAdams, supra note 18, at 256-57 (explaining that while a focus on Prisoner's Dilemma makes regulatory sanctions central, coordination games tend to lead to a focus on nonstate actors and nonregulatory solutions).
242. McAdams, supra note 18, at 210-13.
243. Richard H. McAdams, A Focal Point Theory of Expressive Law, 86 VA. L. REV. 1649, 1710 (2000) (theorizing that where the options are apparent to the participants in a coordination game, "a convention might spontaneously arise in which everyone followed the [efficient] strategy").
244. See supra Part II. B.
245. Id.
246. See McAdams, supra note 18, at 238-39.
247. See Lewis M. Branscomb, The Metric System in the United States, 116 PROC. AM. PHIL. SOC'Y 294, 298 (1972).
248. See Michael R. Franzinger, Latent Dangers in a Patent Pool: The European Commission's Approval of the 3G Wireless Technology Licensing Agreements, 91 CALIF. L. REV. 1693, 1698-99 (2003).
249. Cf. Cristina M. Rodríguez, Language and Participation, 94 CALIF. L. REV. 687, 692-93 (2006) (discussing the challenges posed by multilingualism).
250. See supra note 133 and accompanying text.
251. See Robert B. Ahdieh, Between Mandate and Market: Contract Transition in the Shadow of the International Order, 53 EMORY L. J. 691, 694 (2004);
252. Margaret Jane Radin, Online Standardization and the Integration of Text and Machine, 70 FORDHAM L. REV. 1125, 1132 (2002).
253. See, e.g., Farhad Manjoo, As Browsers Battle, Consumers Stand to Win, N. Y. TIMES, Mar. 26, 2009, at B7, available at 2009 WLNR 5644216.
254. See Allan Hoffman, Predictions and Wishes for the New Year, STAR-LEDGER (Newark, N. J.), Dec. 31, 2009, at 29, available at 2009 WLNR 26207850.
255. See HELLER, supra note 62, at 81.
256. See Robert B. Ahdieh, Making Markets: Network Effects and the Role of Law in the Creation of Strong Securities Markets, 76 S. CAL. L. REV. 277, 310-11 (2003). I will return to these various possibilities of coordination failure infra Part III. B.1.
257. See Russell Cooper et al., Communication in Coordination Games, 107 Q. J. ECON. 739, 765-66 (1992).
258. Id.
259. see also SCHELLING, supra note 133, at 109-10 (conjecturing that even with full communication, participants in coordination games may still reach unfavorable outcomes).
260. See supra notes 31, 35, 132, 138 and accompanying text.
261. See SCHELLING, supra note 133.
262. One might alternatively conceive of this pattern as a modified Meeting Place game. Imagine the same separation of friends in New York City described above, see supra notes 134-36 and accompanying text, but with one starting in the vicinity of Penn Station, while the other is near Grand Central Station.
263. More colloquially, Hawk-Dove games are known by the name Chicken, in which two cars race toward one another and the chicken is the one who swerves first. Cf. Robert B. Ahdieh, The Role of Groups in Norm Transformation: A Dramatic Sketch, in Three Parts, 6 CHI. J. INT'L L. 231, 261 (2005).
264. See DIXIT & SKEATH, supra note 110, at 447-52.
265. Or their tractors, if you prefer, as in Footloose. The version of Chicken played in Rebel Without a Cause has slightly different payoffs, given Jim and Buzz's race toward a cliff, rather than toward each other.
266. In the game of Chicken, thus, it is better to swerve than to crash.
267. See McAdams, supra note 18, at 212-13.
268. If we define communication as the distribution of perfect information, it does hold the solution to even conflictual coordination games. For present purposes, however, I am concerned with communication in the more conventional sense.
269. Communication intended to promote coordination may sometimes be foreclosed by regulation itself. Such communication among competitors-including under the rubric of standard-setting organizations-might thus be conceived as a collusive violation of antitrust rules.
270. See Mark A. Lemley, Intellectual Property Rights and Standard-Setting Organizations, 90 CALIF. L. REV. 1889, 1943 (2002).
271. From this perspective, antitrust law might itself be thought of as regulatory treatment of coordination. It is the flip side of the analysis herein, however, because of its deterrent, rather than facilitative, impact.
272. Even in Stag Hunt (or assurance) games, communication may not eliminate the possibility of coordination failure. as Jean-Jacques Rousseau envisioned such games, a player might abandon coordinated strategies in exchange for a smaller, but more certain, gain. Rousseau explained that, "[i]f it was a matter of hunting a deer, everyone well realized that he must remain faithful to his post; but if a hare happened to pass within reach of one of them, we cannot doubt that he would have gone off in pursuit of it without scruple." JEAN-JACQUES ROUSSEAU, A DISCOURSE IN INEQUALITY 111 (M. Cranston trans., 1984).
273. See OLSON, supra note 116, at 18-19. This highlights a distinct framework within which the coordination-driven interactions I emphasize herein might be understood.
274. Richard O. Zerbe, Jr. and Howard E. McCurdy sharply critique the market failure framework within which collective action problems, externalities, and the like are commonly understood-and that my analysis seeks to extend by integrating coordination failures as well. In place of that framework, they favor a transaction-cost analysis of public interventions in the market. In their approach, intervention depends not on the identification of a market failure-be it a collective action problem, an externality, or the coordination failures I add to the conventional litany-but on the government's ability to reduce transaction costs: "In general, anytime government can reduce private transaction costs or its own costs of provision, it should do so regardless of whether or not an externality exists. It need not wait for the appearance of an externality to effect a justification. "
275. Richard O. Zerbe, Jr. & Howard E. McCurdy, The Failure of Market Failure, 18 J. POL'Y ANALYSIS & MGMT. 558, 565 (1999);
276. see also Richard R. Nelson, Roles of Government in a Mixed Economy, 6 J. POL'Y ANALYSIS & MGMT. 541, 543 (1987) ("Does it make sense to say that we need government to do these things because of 'market failure'? Or is it more useful to keep in mind that certain functions of government need to be in place for markets to do what we want them to do?"). This account is equally conducive to my emphasis on coordination, if not even more so. Regulatory interventions in the service of coordination-in standardsetting, for example, which Zerbe and McCurdy highlight-may thus be among the most important sources of transaction-cost savings.
277. See Zerbe & McCurdy, supra, at 572.
278. See supra Part I.
279. In some cases of standard setting, of course, the ability to communicate will suffice to ensure optimal coordination.
280. See Microsoft v. Google: When Clouds Collide, ECONOMIST, Feb. 9, 2008, at 69, available at 2008 WLNR 1483992.
281. See Robert B. Ahdieh, The Strategy of Boilerplate, 104 MICH. L. REV. 1033, 1051-53 (2006). The limiting factor is the counterparty's own reservation point. It thus accomplishes little to create expectations of a commitment point outside the bargaining zone of one's counterparty.
282. See id. at 1051-52.
283. In contract negotiations, I have identified contracting norms to be a potential source of such salience.
284. See id. at 1053-55.
285. See SCHELLING, supra note 133, at 146 ("When the outcome depends on coordination, the timely destruction of communication may be a winning tactic. When a man and his wife are arguing by telephone over where to meet for dinner, the argument is won by the wife if she simply announces where she is going and hangs up. And the status quo is often preserved by a person who evades discussion of alternatives, even to the extent of simply turning off his hearing aid.").
286. Beyond the presence of conflict and the limits of communication, incomplete information and uncertainty regarding relevant third parties may be further obstacles to efficient coordination.
287. See DENNIS CHONG, COLLECTIVE ACTION AND THE CIVIL RIGHTS MOVEMENT 113-14 (1991).
288. See Charles A. Reich, The New Property, 73 YALE L. J. 733, 787 (1964).
289. To be clear, I do not mean to suggest a precise analogy to Reich's account. His emphasis on the changing function and impact of the regulatory state, however, echoes the argument I make in this Article.
290. See Rubin, supra note 20, at 1425-26.
291. See DIXIT & SKEATH, supra note 110, at 274.
292. See McAdams, supra note 18, at 256-57.
293. See SCHELLING, supra note 133, at 21;
294. Ahdieh, supra note 176, at 1053;
295. McAdams, supra note 18, at 231.
296. More precisely, it turns on each one's ability to determine what other players are likely to expect of them.
297. See SCHELLING, supra note 133, at 54.
298. Id.
299. CASS SUNSTEIN, REPUBLIC 2.0, at 159 (2008);
300. Edward Glaeser, Coercive Regulation and the Balance of Freedom, CATO UNBOUND (May 11, 2007), http://www.cato-unbound.org/2007/05/11/edward-glaeser/ coercive-regulation-and-the-balance-of-freedom/.
301. See Andrew T. Guzman, A Compliance-Based Theory of International Law, 90 CALIF. L. REV. 1823, 1844 (2002).
302. See Jim Snyder, Budget Includes Cap and Trade Revenues, THE HILL (Feb. 26, 2009), http://thehill.com/homenews/news/18465-budget-includes-cap-and-trade- revenues.
303. See generally Wayne B. Gray & John T. Scholz, Does Regulatory Enforcement Work? A Panel Analysis of OSHA Enforcement, 27 L. & SOC. REV. 177, 179 (1993) (discussing incentive structure of OSHA workplace-safety rules).
304. Command-and-control regulation may also shape expectations, of course, if necessarily with a heavier hand. In relevant circumstances, however, it does for reasons beyond its coerciveness.
305. See SCHELLING, supra note 133, at 57-58.
306. See id.
307. See ROBERT SUGDEN, THE ECONOMICS OF RIGHTS, CO-OPERATION AND WELFARE 89-90 (1986).
308. See Randal C. Picker, Simple Games in a Complex World: A Generative Approach to the Adoption of Norms, 64 U. CHI. L. REV. 1225, 1284-85 (1997). (Pubitemid 127445780)
309. See Ahdieh, supra note 38, at 223-25.
310. See id. at 259-61. Examples might include the issuance of reports, the convening of conferences, and the use of the government's purchasing power. In the distinct task of displacing an existing, but inefficient, focal point, another tool might be the development of menus of choices, by which the salience of the status quo equilibrium might be diminished.
311. See Jane Sasseen & Theo Francis, Paulson Buys Up the Banks, BUS. WK., Oct. 13, 2008, http://www.businessweek.com/election/2008/blog/archives/2008/10/ paulson-buys-up.html.
312. See David Enrich, Lending Drops at Big U. S. Banks, WALL ST. J., Jan. 26, 2009, at A1 (suggesting that the decline in lending "raises fresh questions about TARP's effectiveness at coaxing banks to reopen their lending spigots").
313. See, e.g., Appropriate Framework for Broadband Access to the Internet over Wireline Facilities, Policy Statement, 20 F. C. C. R 14, 986 (2005).
314. See Ahdieh, supra note 38, at 251-52.
315. See Deborah Solomon et al., Ultimatum by Paulson Sparked Frantic End, WALL ST. J., Sept. 15, 2008, at A1.
316. See McAdams, supra note 146, at 1712 (describing law's effect on behavior not simply as a product of legal sanctions, but from its impact on the environment in which people interact).
317. This highlights a further point. That noncoercive state behavior may have a focal point or coordinative effect tells us nothing about the efficiency of that result. The government may not be particularly good at selecting among alternative coordination points. It may also not be especially timely in doing so. It is for this reason that recognition of the coordinative function of regulation may counsel a broader conception of reviewable state action.
318. See Clifford Shearing, Reflections on the Refusal to Acknowledge Private Governments, in DEMOCRACY, SOCIETY AND THE GOVERNANCE OF SECURITY 11, 20-23 (Jennifer Wood & Benoît Dupont eds., 2006) (explaining that a monopoly over the legitimate use of physical force is a key conceptual component of sovereignty).
319. See SCHELLING, supra note 133, at 56.
320. See id. at 144.
321. See Hal R. Varian, The Information Economy: How Much Will Two Bits Be Worth In the Digital Marketplace?, SCI. AM., Sept. 1995, at 200-01.
322. See, e.g., id.
323. See generally Information Economy Project at George Mason University School of Law, GEO. MASON. U., http://www.iep. gmu.edu (last visited Sept. 22, 2010) (studying the interaction of law and economics on the information economy).
324. See Diamond & Dybvig, supra note 31, at 404 ("[A] bank run in our model is caused by a shift in expectations, which could depend on almost anything, consistent with the apparently irrational observed behavior of people running on banks.");
325. Masson, supra note 36, at 4;
326. T. C. Schelling, For the Abandonment of Symmetry in Game Theory, 41 REV. ECON. & STAT. 213, 220-21 (1959).
327. See David Singer & Alexandra Guisinger, Explaining de Jure Versus de Facto Exchange Rate Regime Choices, Mar. 26, 2008 (unpublished manuscript) (on file with author) (paper presented at the 49th annual meeting of International Studies Association in 2008).
328. See infra notes 246-52 and accompanying text.
329. See Mark A. Lemley & David McGowan, Legal Implications of Network Economic Effects, 86 CALIF. L. REV. 479, 491-92 (explaining that the increased utility of a large number of users on an operating system will promote migrations to that system, both in terms of users and available applications).
330. See id. at 502.
331. See Dale A. Osterle, Regulation NMS: Has the SEC Exceeded Its Congressional Mandate to Facilitate a "National Market System" in Securities Trading?, 1 N. Y. U. J. L. & BUS. 613, 619 (2005) (describing the SEC's goal to design a nationwide system to make market information universally available).
332. See Ahdieh, supra note 38, at 251-52.
333. See id.
334. See Joseph Grundfest & Alan L. Beller, Reinventing the Securities Disclosure Regime: Online Questionnaires as Substitutes for Form-Based Filings 3-4 (Stanford Univ. Law & Econ., Olin Working Paper No. 361, 2008), available at http://papers.ssrn.com/sol3/papers.cfm?abstract-id=1235082&.
335. See Ronald J. Gilson & Charles K. Whitehead, Deconstructing Equity: Public Ownership, Agency Costs, and Complete Capital Markets, 108 COLUM. L. REV. 231, 256 (2008) ("[T]he informational efficiency of public company share prices provides an important management tool-a company receives virtually instant feedback through prices and periodic feedback through analyst reports, concerning its strategy and performance and that of its competitors....").
336. See Osterle, supra note 216, at 619-23 (2005);
337. Junius W. Peake, Entropy and the National Market System, 1 BROOK. J. CORP. FIN. & COM. L. 301, 303-04 (2007).
338. The National Institute of Standards and Technology describes itself as a "non-regulatory" federal agency within the Department of Commerce.
339. See NIST General Information, NAT'L INST. STANDARDS & TECH., http://www.nist.gov/public-affairs/general-information. cfm (last modified Oct. 5, 2010). Its mission is to promote innovation by advancing "measurement science, standards, and technology."
340. Id.
341. See, e.g., 21 C. F. R. §§ 812.20-.27 (2010) (requiring applications for the use of a significant risk device in investigations to supply a complete record of prior investigations).
342. See, e.g., Ehud Guttel & Alon Harel, Matching Probabilities: The Behavioral Law and Economics of Repeated Behavior, 72 U. CHI. L. REV. 1197, 1197-200 (2005);
343. Christine Jolls et al., A Behavioral Approach to Law and Economics, 50 STAN. L. REV. 1471, 1473-76 (1998); (Pubitemid 128421723)
344. Tanina Rostain, Educating Homo Economicus: Cautionary Notes on the New Behavioral Law and Economics Movement, 34 L. & SOC'Y REV. 973, 973-76 (2000).
345. Brian C. Mooney, Harvard's Sunstein to Oversee Regulation, BOS. GLOBE, Jan. 9, 2009, at 12, available at 2009 WLNR 435653.
346. See THALER & SUNSTEIN, supra note 101, at 6 (discussing the opportunities and duties presented to "choice architects").
347. Daniel A. Farber, Toward a New Legal Realism, 68 U. CHI. L. REV. 279, 283-88 (2001).
348. Contra Charles R. Plott & Kathryn Zeiler, Exchange Asymmetries Incorrectly Interpreted as Evidence of Endowment Effect Theory and Prospect Theory?, 97 AM. ECON. REV. 1449, 1449-50 (2007).
349. For a discussion of how to use cognitive failures and biases to facilitate certain outcomes in tort, see Jolls et al., supra note 224, at 523-32.
350. See THALER & SUNSTEIN, supra note 101, at 6.
351. See id. at 3-4.
352. Picker, supra note 196, at 1228.
353. See Rostain, supra note 224, at 990-95.
354. SCHELLING, supra note 133, at 54-55;
355. see also Diamond & Dybvig, supra note 31, at 404 (noting that any irrationality can potentially shift the expectations and drive a bank run);
356. Masson, supra note 36, at 4 (describing the notion of "sunspots" in economics as "irrelevant variables that nevertheless coordinate investors' expectations"). Such irrationality is understandably problematic for scientific analysis, formal modeling, and the like. Masson, supra note 36, at 4. Nonetheless, that irrationality may be critically relevant for effective coordination.
357. See SCHELLING, supra note 133, at 54, 57.
358. See id. at 57.
359. See Crawford & Haller, supra note 132, at 572.
360. See generally DIXIT & SKEATH, supra note 110, at 233-60 (discussing some counterintuitive results in games with mixed-strategy equilibria).
361. See POUNDSTONE, supra note 18, at 103-05.
362. Crawford & Haller, supra note 132, at 572.
363. As emphasized above, this multiple equilibrium dynamic does not disappear in the presence of conflict. See supra Part II. C. Here, the infamous game of Chicken is starkly suggestive. Surely I prefer to win by not swerving, when my opponent does so. I strongly prefer to lose by swerving, however, when my opponent does not swerve. Bluntly put, losing is Pareto superior to dying.
364. For an example of the growing range of actions we might consider regulatory, see supra Part III. A.2. For an example of a potential coordination failure, consider the choice of whether to meet at Grand Central or Penn Central. Supra Part II. B.
365. Cf. Wiley, supra note 127, at 1916-18 (explaining that the punishments imposed by antitrust statutes will effectively prevent all collusion in a finitely repeated duopoly situation).
366. See Robert P. Merges & Jeffrey M. Kuhn, An Estoppel Doctrine for Patented Standards, 97 CALIF. L. REV. 1, 6 (2009).
367. See James J. Angel, Consolidation in the Global Equity Market: A Historical Perspective (Feb. 25, 1998) (unpublished manuscript) (on file with author).
368. Given that "the inability of agents to coordinate their actions successfully in a many-person, decentralized economy" can prevent entry into the labor market, Cooper and John highlight the potential for underemployment equilibria. Cooper & John, supra note 36, at 442;
369. see also id. at 451 ("Due to coordination failures, the economy can get stuck at a low level of output.").
370. This result assumes, importantly, the presence of some meaningful cost associated with changing from the initial choice.
371. See Ahdieh, supra note 38, at 226-28 (discussing how tipping effects may cause network competition to become inefficient);
372. cf. Geoffrey Heal & Howard Kunreuther, Supermodularity and Tipping (Nat'l Bureau of Econ. Research, Working Paper No. W12281, 2006).
373. Mark A. Lemley & David McGowan, Legal Implications of Network Economic Effects, 86 CALIF. L. REV. 479, 535 (1998).
374. See id. at 483;
375. Howard A. Shelanski & J. Gregory Sidak, Antitrust Divestiture in Network Industries, 68 U. CHI. L. REV. 1, 5, 59 (2001); (Pubitemid 33656733)
376. see also Michael Klausner, Corporations, Corporate Law, and Networks of Contracts, 81 VA. L. REV. 757, 772 (1995) (noting that some products become more valuable as their use becomes more common, and these products confer benefits to other users, creating a network externality).
377. See supra note 246 and accompanying text.
378. See Ahdieh, supra note 38, at 291-92 ("[W]here the proportion of network value to inherent value in a particular good or service... is relatively low, the benefits of the inherent traits of a given good may outweigh the network benefits of its larger competitor, at least for certain users.").
379. See, e.g., JAGDISH SHETH & RAJENDRA SISODIA, THE RULE OF THREE: SURVIVING AND THRIVING IN COMPETITIVE MARKETS 15 (2002).
380. See Ellen P. Goodman, Digital Television and the Allure of Auctions: The Birth and Stillbirth of DTV Legislation, 49 FED. COMM. L. J. 517, 522-25 (1997) (discussing the FCC's restriction on DTV access as a means of "ensur[ing] that broadcast television remained a viable option for those who could not or would not pay for subscription video services").
381. See Ahdieh, supra note 38, at 227 n. 45.
382. See William E. Cohen, Competition and Foreclosure in the Context of Installed Base and Compatibility Effects, 64 ANTITRUST L. J. 535, 550 (1996) ("Adoption of a competitive compatibility standard can yield important network effects. It essentially gives consumers the benefit of other suppliers' networks.");
383. Lemley & McGowan, supra note 247, at 531, 541 (discussing how "courts have considered network effects in deciding whether or not to grant a new or stronger form of intellectual property protection to the standard setter" and using Lotus Development Corp. v. Borland International, 516 U. S. 233 (1996), as an example of the courts' preference for first movers).
384. See supra note 154 and accompanying text.
385. Cooper & John, supra note 36, at 442-43.
386. See supra text accompanying notes 196-98, 226-34.
387. See Neal Kumar Katyal, Judges as Advicegivers, 50 STAN. L. REV. 1709, 1715-20 (1998) (Pubitemid 128426615)
388. construed in Robert B. Ahdieh, Between Dialogue and Decree: International Review of National Courts, 79 N. Y. U. L. REV. 2029, 2076 (2004). For a discussion of judicial advice-giving as an alternative to judicial review, see Ahdieh supra.
389. See supra notes 204-08 and accompanying text.
390. See, e.g., White v. Mass. Council of Constr. Emp'rs, Inc., 460 U. S. 204, 206-08 (1983)
391. (construing Reeves, Inc. v. Stake, 447 U. S. 429, 436-39 (1980)
392. and Hughes v. Alexandria Scrap Corp., 426 U. S. 794, 810 (1976)) ("[W]hen a state or local government enters the market as a participant it is not subject to the restraints of the Commerce Clause.").
393. Cf. Paul Norman, The Big Match-Lexis v. Westlaw, 4 LEGAL INFO. MGMT. 90, 96 (2004) (asking if the United Kingdom can safely ditch Lexis and rely solely on Westlaw, but concluding that although Lexis has a larger case archive, it suffers from the absence of a sophisticated indexing system).
394. See supra text accompanying notes 61-64.
395. See generally Ronald Hirshhorn et al., Innovation in a Knowledge-Based Economy: The Role of Government, in PRODUCTIVITY ISSUES IN CANADA 789, 789-832 (Someshwar Rao & Andrew Sharpe eds., 2002).
396. In encouraging the movement away from a dominant practice or norm, one might also imagine an important role for menus generated by public authorities. Cf. Klausner, supra note 248, at 839-41 (noting that corporate law can create menus to promote coordination in network externalities). Such menus of options or alternatives might be expected to help diminish the salience of the dominant standard, which would presumably be included in any menu, but only as one among numerous potential options.
397. Robert Axelrod famously posited the potential for the "evolution of cooperation" in repeat play Prisoner's Dilemma games.
398. See ROBERT AXELROD, THE EVOLUTION OF COOPERATION 7-14 (1984)
399. [hereinafter AXELROD, EVOLUTION OF COOPERATION];
400. Robert Axelrod, The Emergence of Cooperation Among Egoists, 75 AM. POL. SCI. REV. 306, 307 (1981) (discussing the appropriate conditions for cooperation to emerge);
401. Robert Axelrod & William D. Hamilton, The Evolution of Cooperation, 211 SCIENCE 1390, 1391-93 (1981);
402. Michael Trebilcock & Paul-Erik Veel, Property Rights and Development: The Contingent Case for Formalization, 30 U. PA. J. INT'L L. 397, 412-13 (2008) (discussing Axelrod's game theory approach and how "mutually beneficial cooperative outcomes can arise in a repeated prisoner's dilemma").
403. See AXELROD, EVOLUTION OF COOPERATION, supra note 265, at 10-11 ("[W]ith an indefinite number of interactions, cooperation can emerge.").
404. See id. at 45-46 (discussing various strategies that may lead to cooperation);
405. CHONG, supra note 179, at 39-42 (describing the strategy of mutual defection working itself into a pattern of cooperation).
406. See, e.g., Amnon Rapoport et al., An Experimental Study of Coordination and Learning in Iterated Two-Market Entry Games, 16 ECON. THEORY 661, 685 (2000) (pointing to Nash equilibrium as an explanation for tacit coordination in multi-member iterated games).
407. This is likewise true where repetition is not indefinite, but there is some operative uncertainty as to the timing of any final play.
408. McAdams, relying on the work of Geoffrey Garrett and Barry R. Weingast, points out a further dynamic of coordination that may emerge with the iteration of a Prisoner's Dilemma game: the choice among alternative policy equilibria around which the parties might coordinate.
409. See McAdams, supra note 18, at 228-29.
410. Such tax incentives, of course, fall outside the regulatory paradigm of noncoercive regulation that is not directed to incentives, but to expectations.
411. See supra Part III. A.1. Yet this makes perfect sense. In encouraging the iteration of otherwise single-shot Prisoner's Dilemma games, the dynamic at work at the outset is not one of coordination. A multiple-equilibria coordination game only arises once the game has been rendered iterative in nature.
412. It is worth emphasizing, with regard to these and similarly motivated interventions, that the critical mechanism by which cooperation emerges in the Prisoner's Dilemma is not repetition generally, but repetition that is indefinite or, alternatively, where the timing of any final play is uncertain. Beyond encouraging repeat plays generally, therefore, one might speculate about ways in which a coordination-minded regulatory regime might foster uncertainty as to when ongoing relationships might terminate. Here, competing values are necessarily at stake. Recalling the centrality of information in coordination settings, however, one might imagine a regulatory regime that dictates significant information disclosure upfront, but limits required information sharing thereafter, in such a way that fosters uncertainty of a sort conducive to spontaneous cooperation.
413. Cf. Charles F. Sabel & William H. Simon, Destabilization Rights: How Public Law Litigation Succeeds, 117 HARV. L. REV. 1015, 1055 (2004) ("[T]he experimentalist lawmaker does not try to calibrate remedies precisely to induce the desired pattern of conduct, because she does not know with any specificity what the desired pattern of conduct is.").
414. See McAdams, supra note 18, at 229-30 (describing why coordination may be a prerequisite to cooperation).
415. See AXELROD, EVOLUTION OF COOPERATION, supra note 265, at 155-56 (noting that in the case of a government and its citizens, the government elicits compliance by "setting and enforcing the rules so that it pays for most of the governed to obey most of the time"). Contract law might plausibly be cast as helping to serve this function.
416. See supra notes 129-30 and accompanying text.
417. See, e.g., Francis Fukuyama, Differing Disciplinary Perspectives on The Origins Of Trust, 81 B. U. L. REV. 479, 491 (2001) (suggesting that game theory builds on "a premise of methodological individualism" in order to "question how social cooperation arises").
418. For classic treatments of social norms, see generally DAVID K. LEWIS, CONVENTION: A PHILOSOPHICAL STUDY (1969);
419. SUGDEN, supra note 195;
420. EDNA ULLMANN-MARGALIT, THE EMERGENCE OF NORMS (1977). This scholarship has been revisited and substantially refreshed over the past decade.
421. See, e.g., CRISTINA BICCHIERI, The Grammar of Society: The Nature and Dynamics of Social Norms (2006);
422. ERIC A. POSNER, LAW AND SOCIAL NORMS (2000);
423. SOCIAL NORMS (Michael Hechter & Karl-Dieter Opp eds., 2001).
424. See, e.g., ROBERT C. ELLICKSON, ORDER WITHOUT LAW: HOW NEIGHBORS SETTLE DISPUTES (1991);
425. POSNER, supra note 277;
426. Lisa Bernstein, Opting Out of the Legal System: Extralegal Contractual Relations in the Diamond Industry, 21 J. LEGAL STUD. 115 (1992);
427. McAdams, supra note 146.
428. See Rostain, supra note 224, at 990-91 ("If every group endeavor is potentially prey to a collective action difficulty, it becomes necessary to explain the high degree of observed cooperative behavior. To account for cooperation, law and economics scholarship enlists social norms, which compel people to act cooperatively, despite their individual self-interest.").
429. See Clayton P. Gillette, Lock-in Effects in Law and Norms, 78 B. U. L. REV. 813, 819-20 (1998) (suggesting that if costs are reduced, the Prisoner's Dilemma may be reconstructed as an Assurance Game "in which parties will be willing to move to the new equilibrium because they are confident that a sufficient number of others will").
430. See Picker, supra note 196, at 1284-85 (describing how the government and other entities can create a cluster that grows "until the old convention [is] overrun").
431. See McAdams, supra note 146, at 1671-72.
432. See Robert Cooter, Expressive Law and Economics, 27 J. LEGAL STUD. 585, 586-89 (1998). (Pubitemid 128429245)
433. See Cass R. Sunstein, On the Expressive Function of Law, 144 U. PA. L. REV. 2021, 2032-33 (1996). (Pubitemid 126408773)
434. See Ahdieh, supra note 38, at 282.
435. See id. at 279-84.
436. See McAdams, supra note 18, at 218-20.
437. Distinctly, the greater distributional problems in coordination settings might be seen as an argument against intervention in coordination versus Prisoner's Dilemma dynamics.
438. See Herbert Hovenkamp, The Limits of Preference-Based Legal Policy, 89 NW. U. L. REV. 4, 33 (1994);
439. Gary Lawson, Efficiency and Individualism, 42 DUKE L. J. 53, 56 (1992);
440. Robert B. Ahdieh, Beyond Individualism in Law and Economics 4 (2010) (unpublished manuscript) (on file with author).
441. On the grounding of standard law and economics in neoclassical economics, see, for example, Jolls et al., supra note 224, at 1545, and Martha C. Nussbaum, Flawed Foundations: The Philosophical Critique of (a Particular Type of) Economics, 64 U. CHI. L. REV. 1197, 1197 (1997). (Pubitemid 127445778)
442. See Kenneth J. Arrow, Methodological Individualism and Social Knowledge, 84 AM. ECON. REV., May 1994, at 1, 1;
443. Lars Udehn, The Changing Face of Methodological Individualism, 28 ANN. REV. SOC. 479, 489 (2002).
444. Besides the literatures outlined below-studies of network effects, the social nature of knowledge, social norms, and coordination games-other relevant research areas might also be noted in this vein, including analyses of strategic complementarities and herd behavior.
445. See Cooper & John, supra note 36, at 442 (noting the nature of strategic complementarities, as distinct from spillovers, as interactions between actors at the level of strategies rather than merely payoffs).
446. See Joseph Farrell & Paul Klemperer, Coordination and Lock-In: Competition with Switching Costs and Network Effects, in 3 HANDBOOK OF INDUSTRIAL ORGANIZATION 1967, 1974 (M. Armstrong & R. Porter eds., 2007).
447. See Arrow, supra note 290, at 1 ("I want to argue today that a close examination of even the most standard economic analysis shows that social categories are in fact used in economic analysis all the time and that they appear to be absolute necessities of the analysis, not just figures of speech that can be eliminated if need be.").
448. Id.
449. See Lawrence A. Cunningham, Beyond Liability: Rewarding Effective Gatekeepers, 92 MINN. L. REV. 323, 337 n. 75 (2007).
450. See Udehn, supra note 290, at 483.
451. See Rubin, supra note 20, at 1425-26.
452. See, e.g., Andrews & Bajaj, supra note 24, at A1.
453. See, e.g., Healy, supra note 24, at 5.
454. See, e.g., Clifford Krauss et al., Fraud Parade: $8 Billion Case Is Next in Line, N. Y. TIMES, Feb. 18, 2009, at A1, available at 2009 WLNR 3130330.
455. See Vikas Bajaj, Responding to a Housing Crisis, N. Y. TIMES, Aug. 26, 2008, at C1, available at 2008 WLNR 16086145.
456. To be clear, I do not mean to suggest these were not grave issues in their own right. Given its scope, the foreclosure crisis likely warrants even more attention than it has received. I likewise recognize the secondary impact of these varied market failures on credit markets. They do not speak directly to the financial crisis, however, and hence to the recovery of the financial markets.
457. See supra Part III. B.2.
458. A further dimension of the government's task to facilitate coordination amidst the recent financial crisis lies in the structure of the credit markets, by which a bank's lending is dependent on its ability to market its securitized debt to hedge funds and private equity firms.
459. See supra notes 25-40 and accompanying text. Some dynamic of coordination consequently exists across distinct categories of banking and private investment entities as well.
460. Again, I do not wish to suggest that such coercion does not have its place in addressing fraud, excessive risk taking, and analogous defections from efficient equilibria-or that such defections are uncommon.
461. See Deborah Solomon & Jon Hilsenrath, Bank Capital Gets Stress Test, WALL ST. J., Feb. 26, 2009, at A3.
462. Cf. Andrew Ross Sorkin, Merrill Is Sold; Failing to Find Buyer, Lehman Set to File for Bankruptcy, N. Y. TIMES, Sept. 15, 2008, at A1 (describing various actions taken by Wall Street firms in response to the financial crisis).
463. See Shares Edge Higher as Greenspan Offers Positive Outlook, N. Y. TIMES, July 21, 2004, at C7
464. available at 2004 WLNR 5599926;
465. cf. ELLYN BOUKUS & JOSHUA V. ROSENBERG, THE INFORMATION CONTENT OF FOMC MINUTES 1-5 (2006), available at http://www.newyorkfed.org/research/ economists/rosenberg/Boukus-and-Rosenberg-072006.pdf.
466. This need not correlate with the likelihood that some reports versus others will offer better news. Rather, the notion is that some types of short-term information may be more prone to impact expectations in harmful ways.
467. By comparison, inconsistent prosecution of legal or regulatory violations may be effective if coupled with some indeterminacy as to the occasions for prosecution and sufficiently severe penalties, when it occurs.
468. One might criticize Treasury Secretary Timothy Geithner's initial presentation of the Obama Administration's financial market rescue plan along analogous grounds for its vague and undefined terms.
469. See Deborah Solomon, Market Pans Bank Rescue Plan, WALL ST. J., Feb. 11, 2009, at A1, available at
470. WLNR 3801017. In the shaping of expectations, again, certainty and predictability may be especially essential.
471. I have already emphasized the potential role of private actors in facilitating coordination.
472. See supra notes 206-08 and accompanying text.
473. Consider the case of the 1994 bailout of the Mexican peso, on which the United States turned a profit.
474. See Anthony DePalma, Mexican Rescue Plan: The Overview, N. Y. TIMES, Feb. 2, 1995, at A1. One might see the government's relatively quick resale of IndyMac Bank, subsequent to its takeover, in a similar light.
475. See Equity Partnership is Formed to Buy Remnants of In-dyMac Bank for $13.9 Billion, N. Y. TIMES, Jan. 3, 2009, at B3.
476. Cf. Campbell R. Harvey, The Financial Crisis of 2008: What Needs to Happen After TARP 2-9 (Oct. 5, 2008) (unpublished manuscript), available at http://ssrn.com/abstract=1274327.
477. Cf. Edmund L. Andrews, Bank Crisis Deepens, N. Y. TIMES, Jan. 21, 2009, at B1, available at
478. WLNR 1150590 (explaining the difficulties faced by the Obama Administration in planning the recovery from the financial crisis).
479. See supra Part III. A.3.
480. See Keynes, supra note 38, at 161-62.
481. See Reich, supra note 180, at 787.