Memorandum
Date: June 29, 2001
To: Foundations of the Regulatory State students
From: Avery Katz
Re: Feedback on Spring 2001 exam
This memo sets out what I considered to be the main issues raised by our spring 2001 RegState exam. The memo was composed after I read your exam papers, and so incorporates many of the points that you came up with in writing the exam, as well as those I had identified in advance. Thus, it goes beyond what I expected any individual student to produce on his or her exam paper (and for the first two questions, it also exceeds the word limits by a considerable margin).As on the practice memo assignments, the goal of the exam was for you to apply the concepts and ideas we studied in class to the particular policy issues raised by the individual problems. Thus the key to a strong performance was finding the appropriate balance between the general and the specific. Similarly, the exam questions all were based on issues that were analogous to, but in some ways different from, the topics we discussed in class, so a good answer would have paid attention to both the similarities and the differences. Furthermore, as I indicated in my comments on exam preparation, a good answer should take counterarguments seriously, and should make sure to distinguish between stronger and weaker arguments and between more and less important issues.
Pending permission from the authors, I will also post on the website the
top student answers to each of the questions to the exam. What made these answers the best was their coverage of arguments, detail and sophistication in their use of facts and in seeing both sides of the issues, clarity in organization and explanation, and the way they demonstrated mastery of concepts from the course. If you drew different inferences from the given facts than the top answers did or chose to discuss different issues, you wouldn't have lost points, unless your inferences were unreasonable or your choice of issues inappropriate.Your individual exams will be available for inspection after July 2 at the office of my assistant, Nadine Baker (600/1 JG, 4-7594). I did not make many written comments on the exams themselves; instead, I used a system of symbols to indicate my reaction to particular arguments and inferences. A key to these symbols is attached. I also kept a score sheet containing my own notes on each exam. If you want to discuss your individual exam, please feel free to contact me. You will find it useful, however, to read this model answer as well as the top answers before we meet.
It was a pleasure teaching the class, and I wish you all well. Please keep in touch.
Question 1: Summary of suggested answer
This question was, in my opinion, the most challenging one on the exam, in that it asked you to apply conceptual material from the workplace unit to an issue that, while related to the employment relationship, was significantly distinct from the health and safety concerns we focused on in class and in the readings. In addition, the question’s subject-matter likely overlapped with material from your contract and civil procedure class, requiring you to sort out policy and theoretical issues raised by this course from those raised in previous classes. Most significant in making this a hard question, however, was that the free-market position you were asked to counter was deliberately described in only the most general terms, requiring you to anticipate and reformulate it in order to attack it.Note also that the question asked you to take the role of a pro-worker policy activist, writing an internal memo on political strategy. Thus while was appropriate for you to organize your answer from the perspective of what was best for workers, the question did not call for an argumentative brief as such, and in particular, it asked you to indicate the strengths as well as the weaknesses of the opposing perspective. Even from a debater’s perspective, furthermore, to argue most effectively against the free-market position requires understanding it thoroughly and characterizing it fairly. Essays that caricatured the free-market position or that argued against it in vague or conclusory terms, accordingly, were less effective than those that clearly identified its internal logic and its positive and normative assumptions, and that showed how those assumptions might be invalid or unpersuasive in the particular context. Essays that identified relevant empirical uncertainties, and suggested ways of resolving them, also were more persuasive than those that did not.
Starting then with the free-market position: the opposition is anticipated to make arguments grounded in at least two normative criteria and perhaps a third. First, there is an efficiency argument, which is pitched at two levels, substantive and institutional. On a substantive level, the opposition’s economist will argue that arbitration is more efficient than litigation, presumably measured in terms of some cost-benefit standard. This is plainly an empirical question and neither you nor the economist is in a position to make the argument persuasive without data and background information that you were not supplied with (and it would have been worth pointing this fact out at the outset.) There was certainly room, however, for you to talk about ways in which the asserted material savings from arbitration might or might not materialize, perhaps based on an analogy to our discussion of workers’ compensation. It would also have been worth flagging aspects of the problem that the economist might (or based on past work, is likely to) have overlooked. These would include the procedural and dignitary values of litigation, attitudes toward risk, and so on, that might reasonably be thought to outweigh the material savings from moving to private arbitration. It would also be appropriate here to point to considerations like moral hazard (i.e., the employer’s reduced incentive to take precautions when not subject to the threat of a lawsuit), although again this depends on the factual particulars of how arbitration works; and a good economist would be unlikely to leave this consideration out of her analysis.
Any such substantive argument regarding the inefficiency of arbitration, however, does not by itself provide an argument for public regulation of the contractual relationship, since it just as easily could be made directly to employers and employees, presented as an argument that an arbitration term is not in their collective interests. Accordingly, the more interesting and important issue is the institutional one of whether the decision to choose one procedure over the other should be made through private bargaining between workers and employers, or through public regulatory institutions. This latter question requires you to consider possible market failures, and the comparative transaction costs of market and state institutions. Here, you would most obviously want to discuss the issues of imperfect information and bounded rationality (i.e., workers lack sufficient information to decide whether arbitration is good for them, and/or underestimate the likelihood that they will come into conflict with their employer), and externality (i.e., an individual worker’s choice of arbitration over litigation may adversely affect third parties not involved in the contract, such as family members, taxpayers called upon to make up the shortfall in compensation, and unrelated litigants who are deprived of the informational benefits and precedential value of public court rulings). Less obviously, there may also be an adverse selection problem, in that if workers have inside information regarding their likely litigiousness, employers who offer the litigation option will disproportionately attract litigious employees and thus may be unable to cover their expected dispute-resolution costs. (Of course, the adverse selection could also work the other way; workers may shy away from firms wishing to contract out of the public court system, and firms may find that despite the efficiency of arbitration, they prefer to send the signal that they are ready to defend their behavior in court, in the same way that retail sellers do not always disclaim consumer warranties to the fullest extent the law permits them to.)
Many students also mentioned unequal bargaining power as a market failure that would justify regulation of arbitration contracts on efficiency grounds, but this issue is more subtle, for reasons we discussed in class. Namely, it is not obvious that an employer with superior bargaining power would want to use that power to force the employee into sub-optimal contract terms, as opposed to just forcing the employee to accept a lower wage. (Some tried to argue that workers’ material needs would force them to sacrifice litigation rights to keep a higher wage, but unless this sacrifice is somehow irrational or misplaced, it provides an argument in favor of the efficiency of arbitration, not against it.) To make use of bargaining power as a regulatory argument, you need to explain why regulation of arbitration in particular is appropriate, and why such an employer wouldn’t just respond to such regulation by further lowering the wage. (One possible explanation is imperfect information about non-wage terms on the part of workers, another is that wages are set by social forces, not by private bargaining, and/or are rigid for significant periods of time.) Merely citing bargaining power as a market failure got you only limited credit. Similarly, various people discussed rent-seeking on the part of employers who take advantage of workers’ sunk cost, ties to the community, vested pensions, etc., but again you would need to explain here why such rent-seeking would take the form of forcing the workers into arbitration rather than cutting their wages.
Finally on the institutional efficiency issue, a complete answer would have considered whether there might be transaction costs or failures in the governmental process that would inappropriately or inefficiently bias public regulators against arbitration and in favor of litigation (e.g., lawyers’ disproportionate influence in public regulatory institutions combined with our selfish collective interest in maintaining the demand for our services), but I have to admit that nobody in the class raised this point.
Move now to the issue of distribution. The economist will argue that leaving arbitration to free bargaining will not just be efficient, but that the efficiencies will be shared and that employees will benefit. Here, though this is not stated explicitly in the question, the economist is making a compensating wage-differential argument of the sort Viscusi made (with some limited empirical support) in the health and safety context. Thus, it is not sufficient to argue that employees do worse ex post from arbitration; you must also argue that any such loss is not made up for ex ante by increases in the wage that employers can now afford to pay out of their cost savings from reduced lawsuits. Here, as before, the best argument you can make is the imperfect-information argument, in that if workers do not appreciate the sacrifice they are making by assenting to arbitration, they will not demand a compensating wage increase and the employer can get away with providing a compensation package that is worth less overall. (Although wages will still rise somewhat — though not enough to compensate for the loss of legal rights — due to employers’ increased demand for labor under an arrangement that lowers their expected cost per worker.)
Two other arguments you can make with regard to distribution, however, have to do with elasticities of demand and supply, and differences between worker groups. The first argument is that if labor supply is inelastic, it is likely that the bulk of cost savings from arbitration will go to the employer. (This is only a partial argument, however, because unless labor supply is perfectly inelastic the workers should still get some share of the efficiency gain, at least under full information.) The second argument is that workers differ in their preferences regarding litigation rights versus wages. The compensating wage differential will reflect the preferences of the marginal workers, who may not be typical of the workers as a group. Additionally, in the particular case of arbitration of federal statutory rights, it may be that certain workers (members of discriminated-against groups, for instance) may prefer legal rights, while others prefer the wage premium, and fair distribution however defined requires protection of the former.
The economist might also be read to be making a liberty-based argument, to the effect that workers’ autonomy rights entitle them to the freedom to decide whether they prefer arbitration or litigation, and any material or non-material advantages that might flow to them from either arrangement. Here there is room to argue about the meaning of liberty (i.e., positive versus negative liberty along the lines of Radin’s arguments on human flourishing), as well as to attack the premises of the autonomy argument (e.g., if workers lack information regarding arbitration, or process it incorrectly, are they really exercising autonomy? But then we need to consider whether the appropriate response is to provide them with the information necessary to make a truly free choice.)
While the foregoing arguments take the economist’s normative perspectives as given and argue within them, there is no reason why you should not raise other perspectives when appropriate and, indeed, a complete answer would have done so. Here the obvious counter to the liberty argument (and to the efficiency and distributional arguments as well) is that the community as a whole has an interest in whether legal rights are traded for higher wages, even if the trade is in the workers’ personal interests. One could argue that the right to sue, at least for wrongs like discrimination, ought to be inalienable, or that basic human rights of equal treatment and respect ought not be commodified. Similarly, one could argue that the maintenance of legal rights in tort is necessary as part of a long-term strategy of political or social change, or alternatively, to protect moral obligations of corrective justice. Explaining and defending such arguments in the specific context of arbitration, of course, would have gotten you more credit than simply flagging them as potential rhetorical moves. My summary here is particularly abbreviated and there was room to expand these arguments substantially, if you so chose.
Question 2: Summary of suggested answer
This question was somewhat more straightforward than the first; for the most part, it called on you to apply concepts drawn from the health care module to the specific issue of mental health coverage. There were two main ways in which you needed to exercise judgment in writing your essay. The first was in choosing the right level of detail at which to address the question. You were given a fair amount of information regarding the built-in limitations of the Mental Health Parity Act (some might call them loopholes, but you were not given any reason to think they were anything but deliberate legislative compromises), but it was not a good use of space to address each of them individually. Those who tried wound up writing essays that were highly repetitive. Plainly the current Act contains ample leeway for health insurers to discriminate between mental and physical health coverage, enough so that it might fairly be described as an exercise (for good or ill) in symbolic politics. The more interesting questions are why these limits are found in the Act and whether it would be worthwhile trying to eliminate some or all of them.The second way in which you needed to exercise judgment was in finding the right balance between policy analysis and practical political advice. The question put you in the role of advisor to a senator trying to decide what position to take on upcoming legislation, so you needed to pay at least some attention to political considerations and constraints in formulating your answer. At the same time, however, you were also told that the senator had at least some interest in promoting enlightened public policy. Since the point of the question was to allow you to display your command of the course material, the more time you spent discussing narrow political tactics, the less time you had to discuss the concepts of the course. In this regard, essays that drew on our class discussions of distributional politics and legislative process, and on conceptual considerations of political economy and public choice, were more effective than those that took a more journalistic or merely descriptive approach to the issue.
Similarly, a number of students appeared to have and to make use of substantial background knowledge regarding mental health issues. To the extent that this background knowledge enabled you to apply ideas from the course with greater clarity and depth, it tended to strengthen your answer, but to the extent that discussion of this background substituted for or crowded out the discussion of course concepts, it tended to detract from it. Remember that the question was designed to be answered by persons without such a background.
In my view, the logical place to start one’s analysis (though not all the successful answers started in this way) is with the question of why unregulated health insurers might treat mental health claims less favorably than physical health claims in the first place. Several possible reasons come to mind here. One is moral hazard: if insured persons overuse their coverage or fail to take opportunities to conserve on mental health costs (or if their providers encourage them to do so), then insurance coverage will be more expensive, and private insurers concerned with their profits will find it in their interest to restrict it. Of course, for this explanation to hold water it is necessary to explain why moral hazard should be a more significant problem for mental health care than for physical health care. One commonly offered answer is that third party payors have a harder time monitoring the efficacy and appropriateness of providers’ treatment decisions in the mental health field, both because of the relative difficulty of finding objective measures of illness and recovery, and because of the relatively greater variations in opinion among mental health professionals regarding what counts as appropriate care. Some of you argued, conversely, that moral hazard should be less of a problem with regard to mental illness, in that advance precautions are less important in avoiding situations that require acute care (compare the role of wearing seatbelts, avoiding dangerous behaviors, etc., in avoiding physical accidents ). Again, this is an empirical question that requires supporting data in order to be fully persuasive.
A second reason might be adverse selection; i.e., if individual consumers of mental health care have better information than insurers regarding their likely needs for coverage. Again, one would need to explain why this is more of a problem for mental than for physical health; and the subjective nature of interior mental experience might, as with moral hazard, point toward an answer.
A third and rather different explanation of differences in coverage would lie in discriminatory social attitudes toward mental illness. One way in which this could happen would be for insurers themselves to irrationally discount the importance of mental health coverage or to shun insureds requiring such coverage — although if insureds are prepared to pay a fair premium for coverage, such discrimination would work against the insurers’ own economic interests. A perhaps more plausible mechanism arises through the interests and attitudes of insurance purchasers. Because most health insurance plans are purchased through employers acting as intermediaries, an adequate match between insurance policies and the needs and interests of insureds depends upon the ability and incentive of the insureds’ employers to represent their workers’ needs to the insurers and to negotiate appropriate terms. If individual workers are reluctant to communicate their mental health needs to their employers for fear of being stigmatized or discriminated against at work, or if the majority of insureds who do not expect to need significant mental health care services object to paying premiums to cover the costs of those who do, insurance coverage is likely to be inadequate. Similarly, the stigma attached to mental illness may lead even the insureds themselves to minimize or discount the possibility that they will need mental health coverage at some time in the future (one could combine this last point with a bounded rationality argument to the same effect.)
Finally, a fourth reason could be that those in need of mental health coverage are, due to their associated disabilities, in general poorer and less likely to be employed than those in need of physical health coverage. This explanation would depend on empirical data and is not obviously true, but if it is true it would easily explain why insurers are not interested in offering services to those who are unable to afford to pay for them.
These and similar factors could explain why state intervention is necessary to provide fuller insurance coverage of mental health care. The same factors, however, suggest that such regulatory mandates will have the effect of increasing health care costs, and that insurance companies and insureds who do not expect themselves to need mental health care will have an incentive to try to avoid the constraints of such mandates. E.g., insurers might respond to requirements of equal coverage by raising rates, by increasing their efforts to screen their customers or separate them into separate risk classifications, by eliminating mental health coverage if this option is permitted to them, or by decreasing insurance coverage across the board. Depending on circumstances and on the design of the applicable regulations, the net effect could be less insurance coverage rather than more. Thus, your answer should also have discussed how potential regulations might be subject to, or might be designed to overcome, such potential "paradoxes of regulation" (as Sunstein calls them). Such a discussion would depend on the particular recommendations that you made, and so your actual discussion would appropriately have been more extensive than the brief sketch offered here. For instance, any system of required coverage leads naturally to the question of what rates insurers are allowed to charge for such coverage, and so potentially implicates issues of price regulation.
Finally, as with the first question, there was also room for you to discuss and compare the various normative rationales for regulation in the health insurance field. Distributional equity was the most obvious consideration here, since any regulatory mandate would increase costs for some insureds in order to provide greater services for others, but the adverse selection argument (and perhaps also considerations of bounded rationality and social discrimination against the mentally ill ) could be used to support mandatory coverage on efficiency grounds. The issue of moral hazard provides an opportunity to talk about potential tradeoffs between efficiency and equity, both in the abstract and in the specifics of particular regulatory programs. Similarly, those of you who argued for mandated coverage as part of a larger political program to change social attitudes regarding mental illness — which, in my view, is critical to understanding why MHPA was actually passed in the form that it was — were implicitly or explicitly making a communitarian argument, and identifying and defending it as such had the potential to strengthen your answer substantially.
Question 3: Summary of suggested answer
This question was in my opinion the most straightforward of the three, in that it invited you to apply in fairly direct fashion our comparative institutional discussions from the environmental module, and asked you to present your ideas in the form of an informational lecture rather than as more role-bound advice. Perhaps for this reason, the class’s average point score on this question was the highest of the three exam questions). There were three twists, however, that made this question interesting. First, the question was explicitly situated in the context of political constraint. You were told that the Bush administration had committed itself to reject prior approaches to global regulation of CO2, so that at least some of the regulatory approaches we discussed (most notably, any extensive system of Pigouvian emission taxes or command-and-control regulation) would face substantial practical barriers to enactment. Second, the question required you to consider international aspects of environmental regulation — a topic we touched on only tangentially in our class discussions. Thus a complete answer should have included some discussion about how regulatory issues might play out differently in the international context. Third, you were asked to address the problem of CO2 emissions, in contrast to our class discussions in which we focused on SO2 emissions. You were not given any background information on the global warming problem (except for some very brief discussion of it in the coursepack) and so were not expected to know or use specific facts about it in your answer. You should have considered the possibility, however, that not all of the particular scientific and technical issues we discussed in the SO2 would apply here. For example, the global warming literature seems to suggest that the problem of "hot spots" — the potential build-up of high pollution levels in local areas that can occur under an unrestricted emissions trading program — is much less of a problem for CO2, where the critical issue seems to be the total amount of greenhouse gases emitted globally. Whether or not this is the case, however, you should not have automatically assumed that all technical and political issues are the same for the two kinds of pollutants.Each of these complications presented you with problems of planning and judgment. For example, a minority of students assumed as a starting point for their essays that no national CO2 policy would be possible in the US for the time being, and so focused entirely on grass-roots, local, or international approaches excluding the US government. This strategy made it hard to write an essay that made effective use of the course materials, though a few of you managed to pull it off. Conversely, students who that ignored the problem of political feasibility and simply churned through a list of the theoretical advantages and disadvantages of various regulatory approaches tended to write merely adequate essays. Those who took a more balanced approach to the problem of political feasibility problem (and who enriched their discussions with analyses of political economy) tended to do the best.
With regard to the international aspects of the problem: the important issues to discuss were administration and enforcement (complicated by the lack of a strong central authority), distributional equity and politics (stemming primarily though not exclusively from the wealth gap between more and less developed countries), and the diversity of needs and interests (arising from differences in geography, economic development, political organization, and social and cultural values) that might justify different policies being applied in different areas. Of course the most important point to make in this regard is that the CO2 problem is global in scale and that an uncoordinated approach of independent national regulation will be inadequate to address cross-border externalities.
With regard to the particular regulatory strategies you might have discussed, most of you chose to focus on three of the following four: taxing emissions, subsidizing reductions in emissions or technological investment, tradable emissions permits, or some form of traditional command-and-control regulation. It was also possible to group some of these together as aspects of a single strategy (e.g., Pigouvian taxes and tradable permits as alternate ways of implementing a market-based regulatory system), or to distinguish different policy variations within these general categories (e.g., by comparing emissions-based or ambient-air-standard-based command-and-control policies). Some of you discussed strategies of political persuasion designed to increase public appreciation of environmental values, and a few discussed the use of ex post liability (although given the global nature of the problem together with the scientific uncertainty that surrounds issues of specific causation, this last strategy seems especially unworkable as a practical matter.) In comparing and contrasting these particular policy approaches, furthermore, a complete answer should have considered their relative cost-effectiveness, distributional consequences, administrative workability, responsiveness to concerns of democracy and political legitimacy, and their effect on community and and cultural values (regarding the environment or otherwise.) The top student answers that I’ve posted for you illustrate most of the main available points and arguments in this regard.
Key to symbols used to mark exams:On some exams I circled particular words or phrases that I found questionable or unclear, and attached these symbols to them.
good point or argument ! excellent point or argument ~ fair point, or incompletely or unclearly expressed – weak point … point needs elaboration " point already made, repetitive, or unnecessarily restating facts ? unclear ?? very unclear, confused, mixing together separate points x mistake of law, misstatement of fact, misuse of term x? point appears mistaken # irrelevant or tangential point #? point's relevance unclear ns non sequitur: conclusion does not follow ff fighting facts: contradicting stated facts or making assumptions inconsistent with them ll laundry list: throwing in relevant and irrelevant arguments alike, without distinction lec lecturing: abstract discussion unconnected to the problem at hand ua unsupported assertion / unidentified assumption