Chicago Global

Comparative Maternity Leave

It is well known that the United States has one of the least generous parental leave policies in the world. A current project of mine is to try to explain why this is so, and then to project the likely future path of law and private practice in this area. I am very eager for insights arising out of other countries' law and practices, and so I welcome readers' comments and observations.

I begin with a few observations, and then I will return in a subsequent post to a few theories. First, in the U.S. only recently has law required employers to hold jobs for employees who take leave to give birth, beyond that leave which they may have under disability clauses. Meanwhile, most other countries, ranging from rich ones to poor ones, promise paid leave for weeks or months. Some extend the leave to fathers, but for the present I focus on the most basic maternity leave. In some countries the cost of paid leave is shared between the government and the employer. My first observation is that the U.S. system is "upside down" compared to others, and can be seen either as regressive (in terms of income) or simply as designed to respond to market pressures against a backdrop in which there is an expectation of participation in the labor force by women. Thus, many private firms in the United States offer astonishingly generous leave (astonishing as compared with other countries) to highly paid employees.  Many law firms give several months paid leave in the event of maternity, and yet paralegals or secretaries at the same firms may get only a few weeks of paid leave. In many other countries, indeed in most, the "paid leave" is capped at something like the social insurance wage.  A banker or lawyer in the U.S. might get $100,000 worth of leave time; the secretary in the same firm might get $3,000; the delivery-person who works for a vendor to that firm might get $0 (or perhaps we should put some option value on the promise of the job held open, as required by law).  Meanwhile, in many other countries all three persons would get the equivalent of perhaps $10,000. We might say that the private market perceives that generous maternity leave is a means of attracting women to high-end jobs, and perhaps of retaining them as well, while the political "market," or moral climate, in most countries is more egalitarian, to be sure, but not necessarily more generous in terms of overall cost or aggregate benefits.

It goes without saying that if private employers offer real (market wage rather than minimum wage or social insurance level) paid leave to enough employees, there is less political pressure for the social insurance approach. Note also that birth rates and child health do not explain very much of the international variance.  They explain a little, such as Scandinavian generosity, perhaps (longer leaves, with paternity included if not required), but not much.

I do not believe that any system ties its benefits to retention. Many systems have vesting periods, so that one cannot begin work and then very soon thereafter earn paid leave. But I do not think any requires that a portion of benefits be forfeited if the beneficiary does not return to work. I will return to this possibility - and to why we are likely to abhor it in a future post.

Libertarian Paternalism and a Nationwide DNA Database

In numerous countries, there is considerable debate about establishing or expanding national DNA databases as an investigation tool for criminal law enforcement. The potential benefits of such a database seem enormous in this field: A comprehensive DNA database would not only help to solve crimes more easily, it would also function to prevent future crimes by preventing multiple crimes committed by the same offender and deterring crimes from being committed by other offenders. Finally, DNA evidence can play a large role in exonerating innocent suspects either if the true perpetrator is identified using the "genetic fingerprint" or if the innocent suspects genetic material is not found at the scene of crime.

Many countries have already introduced some forms of collecting DNA samples of criminals. Great Britain established the first criminal DNA database in 1995 and has now the world’s largest of such databases. With great success New Zealand has set up a DNA database including not only coerced samples of convicted felons but also samples of volunteers: Currently, approximately 55% of the crime scene samples match an individual sample present on the database (ESR, The DNA Databank, at http://www.esr.cri.nz/competencies/forensicscience/dna/DNAdatabank.htm, last visited May 14, 2006). In the United States, all states collect samples from certain convicted sex offenders, while some states even require collection of samples from all felons both violent and non-violent. A number of states restrict the types of criminal investigations allowed or require a court order for police access to the database. In addition to the individual state DNA databases, the FBI has created a national DNA database allowing for the exchange of data between the state databases (Combined DNA Index System, CODIS).

The best results in solving and preventing crimes as well as reducing wrongful arrests would arguably be achieved by a comprehensive population-wide DNA database (Kaye, D. H. / Smith, Michael E., DNA Identification Databases: Legality, Legitimacy, and the Case for Population-Wide Coverage, 2003 Wis. L. Rev. 413 (2003)). There should be network effects to large participation in national DNA databases. The more people participate the higher the success rate in solving and preventing crimes. Perpetrators that are part of the database would be found and convicted more easily, and if they are not part of the database the pool of suspects would be at least greatly reduced. Furthermore, people that are registered in the database will be more reluctant to commit crimes in the first place given their higher chances of being apprehended and punished. Moreover, law abiding citizen would not need to worry about being erroneously suspected to have committed a crime since they can quickly clear their name using the genetic data. Finally, it can be argued that the present practice of collecting DNA samples of only convicted persons creates an inherent bias in the system against certain groups. For example, the large number of felons who are black males also increase their abundance of black males in the databases and therefore lead to higher conviction rates in that part of the population (Kaye/Smith, 2003, 454). A nationwide DNA database could avoid such inherent biases.

However, assuming the desirability of a population-wide DNA database, if a government would introduce such a scheme on a voluntary basis, one would expect low participation for numerous reasons discussed below. The concept of libertarian paternalism could be a solution to the participation problem. This concept allows for steering people’s choices in welfare promoting directions without eliminating the freedom of choice (Sunstein, Cass R. / Thaler, Richard H., Libertarian Paternalism is not an Oxymoron, 70 U. Chi. L. Rev. 1159, 1162 (2003)). Applied to DNA databases, the idea is to switch the default rule to mandatory membership in the national DNA database with the right of each individual to opt out of this default. Practically, one could take a DNA sample of each newborn (and each immigrant) and store it safely without government access until the 18. birthday, when each individual receives the right to opt out of the database and have their genetic material deleted. (Possibly there should be an exception from the right to opt out of the database for persons that already committed certain crimes at that point.) In this case, there is no alternative to paternalism (Sunstein/Thaler, 2003, 1180-1182): Once you agree on the desirability of a comprehensive DNA database, the government has to set the default rule one way or the other. Social welfare can be maximized by setting frames and defaults in a welfare promoting way while still respecting the individual choice not to participate.

In this setting, two defaults can be imagined: either having a no mandatory participation in the national DNA database with the option for people to voluntarily opt-in into the database (as used in New Zealand today); or having mandatory registration in the database with the right to opt-out (as suggested by libertarian paternalism). In order to assess whether switching the default rule to mandatory participation with the right to opt out will reach higher participation rates, it becomes necessary to examine the reasons for low participation in a voluntary nationwide DNA database.

Numerous reasons for low participation in a voluntary national DNA database can be found in people’s bounded rationality. Sunstein and Thaler explain the importance of default rules with the psychological phenomena of status quo bias, suggestion, inertia, endowment effect, and ill-formed preferences (Sunstein/Thaler, 2003, 1179-1180). Due to these factors, either default will be "sticky" to some extend. Firstly, status quo bias can play a role in the stickiness of default rules. The existing regime is often robust against changes (Sunstein/Thaler, 2003, 1171; Kahneman, Daniel / Knetsch, Jack L. / Thaler, Richard H., Anomalies: The Endowment Effect, Loss Aversion, and Status Quo Bias, 5 J. Econ. Persp. 193, 197-199 (1991). Given uncertainty about the correct choice, people will often give the default an informational content: the default is seen as something most people do or at least that more informed people do. Moreover, depending on the default setting opting-in or opting-out requires the actions of people. Due to inertia there is a tendency to stick with whatever the default is. The endowment effect is likely to affect people’s valuation of what rights they have making the initial allocation of rights by a default more robust. Finally, many people might lack clear, stable preferences in this area (Sunstein/Thaler, 2003, 1179-1180). For the average law abiding citizen it might not be clear whether participation in the database will make him better or worse off. The above effects of bounded rationality will contribute to the low participation in a voluntary database. These psychological factors play a large role in the low participation of a data base with voluntary opt-in. The same phenomena will support high participation in a national DNA database as soon as the default is switched to mandatory registration with the right to opt-out.

There are several more aspects determining low participation in a voluntary database that are affected by a switch to default participation with an opt-out option:

Some people do not voluntarily join a criminal DNA database because they feel it infringes their right of privacy. These people will not be affected by the switch in the default because they can readily opt out of the database.

Another reason for the reluctance to join voluntarily can be explained by a free-riding effects. Citizen can already profit from the decrease of crime linked to the use of a DNA database in investigating crimes without having to join themselves. Default membership in the database can to some extend avoid such free-riding on the public good of general safety: The stickiness of participation as a default could balance out some free-riding tendencies. However, free-riding on reduced crime rates is still possible by opting out of the default database.

Other people may have an incentive to hold out as long as possible with their participation. For example, a person with criminal intention will be better off not being a part of the database as long as the participation rate in the database will not be significantly above 50% of the population. It is only then that holding out without being registered can result in being in the smaller pool of potential suspects. Switching the default rule would rid this group of the hold out option. Only if the majority of the population opted out of the database, it would be safe for these people to also have their data deleted. However, such a large opt-out rate is unlikely given the psychological phenomena described above.

Another obstacle to joining a voluntary DNA database could be the stigma attached to be in the "database of criminals". This effect is likely to disappear after switching the default for two reasons. First, the suggestive power of the new default will give database participation a better social reputation. Second, the increased participation in the database will make it hard to see the participants as high-potential criminals. A stigma of having something to hide will rather be attached to people opting out of the database while people that are part of the database make a contribution to overall safety.

Finally, many people might feel reluctant to join a database because of the risk of being erroneously suspected of a crime. There is a fear that one might find oneself entangled in investigation because of a mistake in the handling of the DNA. However, this risk assessment of people might be inaccurate. British authorities estimate that the likelihood of a match occurring at random is only one in thirty-seven million (Willing, Richard, Mismatch Calls DNA Tests Into Question, USA Today (Feb. 8, 2000)). Furthermore, there should be benefits offsetting the increase in the risk of error: Current false arrests and convictions could often be prevented if there was genetic evidence to exonerate the suspect. There are often cognitive errors involved in people’s assessment of the risk of error. Rare cases of false indictment based on DNA material will be more salient, triggering the availability heuristic (Tversky, Amos / Kahneman, Daniel, Judgment under Uncertainty: Heuristics and Biases, Introduction, 11-14). Also, people frequently have difficulties comparing risks and benefits of a new technology (Slovic, Paul, in: Tversky, Amos / Kahneman, Daniel, Judgment under Uncertainty: Heuristics and Biases, Chapter 5, 129-131). Setting the default rule on general participation in a DNA database can help overcome such judgment errors by balancing it with the stickiness of the default that works in the opposite direction.

As shown above, employing libertarian paternalism in the context of a national DNA database has numerous positive effects. Several aspects of bounded rationality, such as the status quo bias, suggestion, inertia, endowment effect, and ill-informed preferences, will make the new default rule sticky resulting in higher participation rates that allow the desired network effects in the reduction of crime. Switching the default to mandatory registration with the right of the individual to opt-out, is likely to solve collective action problems connected to voluntary participation, such as free-riding and hold-outs. In the face of the above collective action problems, it seems to leave society better off to switch the default rule automatic membership in the DNA database. Furthermore, the negative stigma of being part of such a database will be turned to a positive contribution to crime reduction. Moreover, people’s frequently ill-informed assessment of the risk of error can be balanced out to some extend by switching the default rule.

The above analysis does not, however, answer two questions:

First, the desirability of nationwide DNA databases to fight crime needs to assessed in a cost-benefit analysis based on empirical data. It is well imaginable that including the large law abiding majority of citizens in such a database will cause enormous costs of acquiring and administering the genetic material that will outweigh the benefits of increased conviction and deterrence (For a positive assessment of a population-wide database see: Kaye/Smith, 2003, 450-459).

Second, the introduction of a national DNA database can be challenged on constitutional grounds. The protection against unreasonable searches and seizures in the 4th amendment can pose a problem (Kaye/Smith, 2003, 442-446). Furthermore, freedom from self-incrimination protected by the 5th amendment could be infringed (Betzel, Margaret, Biometrics: Privacy Year in Review: Recent Changes in the Law of Biometrics, 1 ISJLP 517, 540). These questions need serious examination. However, by establishing a nationwide DNA database using the concept of libertarian paternalism, as argued by this paper, the constitutional problems should rather be diminished that increased: The non-discriminatory sampling of genetic material at birth and the right to opt-out respect the rights of the individual as much as possible.

Privatization: a bitter bite for consumers

In 1990, a century after the enactment of Sherman Act, the Italian Parliament adopted law no. 287, introducing competition law (as it is called in Europe) in Italy, a country with too many monopolies.

Since that date, many privatizations have been carried out. Telecommunications, Energy (oil, gas, electricity, water) and Highways. They have all been extremely profitable, since have allowed the new owners to exploit in the competitive market infrastructures and licences (i.e. essential facilities) respectively built and granted under the public monopoly and paid for by taxpayers money. The economic potential of these companies became clear when they were listed on the Milan stock exchange and many investors slept in tents set in front of the banks' doors to be the first one to buy the newly issued shares. Of course, the shares have been sky-rocketing since their issuance!!!!

Privatization seemed the dawn of a new era of prosperity and many foresaw increased competition and lower prices to the benefit of Italian consumers. The truth, instead, was that the wave of privatizations has replaced the public monopolist with private monopolists. There are several evidences of this phenomenon.

In the telecom sector there has been a moderate increase in competition. New operators have entered the market of both fixed and mobile telephony. However, the process seems to be incomplete. In the fixed telephony there is competition, but the infrastructures (the phone network and the relevant band capacity) are firmly held by the former incumbent. Pursuant to EU telecom rules, the incumbent has been notified as a holder of Significant Market Power (SMP), a definition which triggers temporary and asymmetric regulatory measures aimed at increasing competition. The former incumbent has been fined € 152 million for violating such measures. However, full separation between network ownership and service provision has never been considered...

In the mobile telephony market an oligopoly with three operators has established. Competition might further develop if Mobile Virtual Network Operators (MVNO) were allowed to enter the market. MVNO are operators which lack the network to operate mobile telephony services, but are entitled, pursuant to asymmetric regulation, to purchase band capacity from the SMP operators already in the market. The SMP operators, however, refuse to sell band capacity and are under investigation by the IAA (the decision shall be adopted within days).

In the energy sector, there is a substantial monopoly held by the former incumbents. The biggest of these once state-owned giants, has recently been fined € 290 million for refusal to deal, having refused to sell pipeline capacity to new entrants on the Italian energy market. The cost of energy in Italy is the highest in Europe.

Highways are the last example of ill-fated privatization. The Italian highways network was privatized and sold to ASPI. ASPI was under investigation by the IAA for attempt to monopolizing and has settled a private antitrust lawsuit brought for the same reason. In these days ASPI is planing a merger with the Spanish counterpart Abertis. The merger, however, has raised multiple complaints and is currently under scrutiny because it is alleged to be a disguised sale of ASPI to Abertis, in breach of the Italian law regulating the sale of entities holding public licenses.

All these example make me reflect and conclude that privatization does not always mean increased competition. Is there a philosophy for privatization I can turn to?   

Toward a Theory of Country Size

It is well known that following consolidation, during which it might have looked as if countries were destined to combine into a few supercountries, we entered a period of secession and disintegration, with the number of countries growing.  One puzzle associated with this is why there are so many federations.  What follows is the beginning of a theory of size and confederation - and I look forward to comments before putting this in the form of a full-blown theory.

My starting point is that resources are not spread evenly across regions, so that when one part of a country is rich (as from salt deposits (long ago) or natural harbors or oil reserves), it will prefer to be on its own in order not to share its wealth with a larger group. But of course these pockets of wealth will be vulnerable to attack (trade wars and embargos for starters, but then military invasions too) if they are on their own and not in reliable alliances.  "Optimal" country size is thus about compromising security (which is positively correlated with size) with the cost of sharing valuable resources. Risk averse people might agree on a large country size if they did not know whether they would be rich or poor, but once they discover regional wealth, that region can be expected to be exploited.

At the same time, large scale and central control creates a monopoly on power and that can be bad for everyone.  A federation can be seen as a kind of compromise.  The central government provides security against outsiders, and to a degree manages competition among the member states or regions.  The members are left with enough power to enjoy some of their regional wealth, and they are in the business of competing with one another for mobile citizens, outside investment, and so forth.  It is as if the region, or province, buys security and some insurance (because it might be resource poor in the future) in return for some ability to enjoy its wealth and to gain from the competition among jurisdictions within the federation.

If invasion comes to be seen as politically or even morally unacceptable, or international organizations spring up that succeed in reducing international grabs, then we should expect more independence movements and more sovereign states because there is less need for mutual security.  I am tempted to say that this is where we are in history, except that it is also true that services and human capital have become increasingly important in the creation of wealth. If immobile natural resources are less important than in the past, then we might find less of a drive to smaller states.  Smaller states will continue to provide more competition among jurisdictions, and that is good in the market for political power and policies, but there will likely be less of a gain in terms of excluding outsiders from making tax or ownership claims on valuable resources.  If so, and other things (especially the threat of invasions) constant, we should expect another phase of consolidation.

At the same time, large scale and central control creates a monopoly on power and that can be bad for everyone.  A federation can be seen as a kind of compromise.  The central government provides security against outsiders, and to a degree manages competition among the member states or regions.  The members are left with enough power to enjoy some of their regional wealth, and they are in the business of competing with one another for mobile citizens, outside investment, and so forth.  It is as if the region, or province, buys security and some insurance (because it might be resource poor in the future) in return for some ability to enjoy its wealth and to gain from the competition among jurisdictions within the federation.

If invasion comes to be seen as politically or even morally unacceptable, or international organizations spring up that succeed in reducing international grabs, then we should expect more independence movements and more sovereign states because there is less need for mutual security.  I am tempted to say that this is where we are in history, except that it is also true that services and human capital have become increasingly important in the creation of wealth. If immobile natural resources are less important than in the past, then we might find less of a drive to smaller states.  Smaller states will continue to provide more competition among jurisdictions, and that is good in the market for political power and policies, but there will likely be less of a gain in terms of excluding outsiders from making tax or ownership claims on valuable resources.  If so, and other things (especially the threat of invasions) constant, we should expect another phase of consolidation.

Employees’ Misperception about their Rights

An interesting study shows that employees do not perceive to be employed at will. Pauline T. Kim, Bargaining with Imperfect Information: A Study of Worker Perceptions of Legal Protection in an At-Will World, 83 Cornell L. Rev. 105 (1997). The employees in such studies were presented with several descriptions of discharges of workers, identifying the reason for each discharge, and asking whether these discharges were lawful. The result showed a tendency that employees perceive to be better protected than they actually are by the employment at will doctrine and its exceptions in the respective states. They live under the impression that termination of their employment relationship is possible only for job-related reasons, which resembles much more the for cause rule than the at will doctrine that actually governs their employment. "Workers appear to systematically overestimate the protections afforded by law, believing that they have far greater rights against unjust or arbitrary discharges than they in fact have under an at-will contract." Kim, at 106.

While it seems plausible in many areas that laymen do not know the exact legal rules due to a lack of information, this systematic misperception poses a puzzle. The goal of this blog post is to show to what extend this misperception can be explained by systematic errors and biases tied to the heuristics that employees use to evaluate the degree of their legal protection. Furthermore, I will draw conclusions on what that means for the employment at will doctrine.

In my opinion, the availability heuristic will be influential in the employee’s decision whether a particular discharge was lawful or not. Hereby, the frequency and the probability of an event are assessed by the ease with which instances or occurrences can be brought to mind. Kahneman, Daniel / Slovic, Paul / Tversky, Amos, Judgment under Uncertainty: Heuristics and Biases, Cambridge: Cambridge University Press, 1982, 11. While lawfulness is not the same as the frequency or probability of occurrence of an incident, it seems likely that these two factors will get intermingled by subjects dealing with the questions posed by the study. The average employee will not have any legal training on the doctrines of employment law. He will have to heavily rely on incidents, stories, and assumptions from inside his own sphere of experience. In doing that, the subject of the study will not only evaluate the lawfulness of the discharge in front of him (even if that is all the question is asking for). He will decide this depending on his perception of whether it is generally legally possible to be discharged for that certain trait, behavior, or incident. Not knowing the general rule, he will also include in his assessment the perceived likelihood that a discharge will actually be based on such grounds. Furthermore, he will take into account how likely this will happen to him being guided by his personal assessment of the risk of him being discharged on the several grounds.

While the availability heuristic might be very useful given the limited legal information of the employee, it also has some inherent systematical errors. Whether an incidence comes to mind is not only determined by its frequency or probability, but also by other factors such as salience and recent occurrence. Whether a reason for discharge sticks out in the memory of an employee (e.g. the person was discharged for setting the factory on fire), or whether it is not that salient (e.g. discharge for continuous underperformance) does not say much about the frequency of that reason and its lawfulness. The same is true for recent occurrence. Also the availability heuristic is prone to bias because incidents that are out of sight are also quickly out of mind. Therefore, even arbitrary but rare incidents can be less retrievable in the employees mind.

Another bias that is even more likely lead to systematic error in the employee’s judgment about his legal protection is the optimistic bias (Slovic, 20) and the tendency that people perceive the world in a way that avoids cognitive dissonance (Kahan/Braman, 188). Even if the employee can easily retrieve information about a certain discharge, he might think that it will not happen to him. Furthermore, it is troubling to live in constant awareness of the world violating your own picture of it. And people find it comforting to believe that what is good according to their own set of values is also permitted under the law. In turn, people like to think of behavior inconsistent with their values as unlawful. Employees have their own sense of what grounds they find reasonable for discharge and which reasons for discharge are arbitrary or unjust. They project that vision of a fair employment relationship into what they believe the legal rules for employment to be. This also leads to people assimilating information biased by what their view on the world is. Kahan, Dan M. / Braman, Donald, Cultural Cognition and Public Policy, 2006, 24 Yale Law & Policy Review, p. 151, 156. "Biased assimilation is the tendency to embrace evidence that supports one’s beliefs about the world and reject evidence that is inconsistent with one’s beliefs about the world." Rachlinski, Jeffrey J., The Psychology of Climate Change, 2000 U. Ill. L. Rev. 299). To maintain or increase their own personal self-esteem people often perceive the world in a way that is self-serving. Blasi, Gary /Jost, John, System Justification Theory and Research: Implications for Legal Advocacy and Social Justice, California Law Review Symposium on "Behavioral Realism and Implicit Social Cognition 2006, 15. Therefore, unjust incidents in the experience of an employee might be filtered out as exceptions to the rule and do not stick with the employees memory that much. This ties in with the availability heuristic because the information that passes the "cultural cognition filter" will be easier retrievable in the decision whether a practice is lawful or not.

One might argue that it seems natural for an employee not to project his view of the employment relationship into his beliefs about the legal system, but that he is more likely to be discontent and to exaggerate the inappropriateness of his legal protection. After all, the employee can be seen as the less powerful party in that relationship that might easily feel taken advantage off. (This is at least frequently the rhetoric of union representatives.) However, system justification theory seems to defy that argument. "People want to hold favorable attitudes about themselves and about their own groups, but they also want to hold favorable attitudes about social and political systems that affect them." Blasi, Gary /Jost, John, System Justification Theory and Research, 5. In particular, members of disadvantaged groups are prone to justify the status quo due to a stronger need to reduce dissonance by justifying their suffering and their position in the current system. Blasi, Gary /Jost, John, System Justification Theory and Research, 16.

Finally, employees might use the heuristic of representativeness also incurring systematical errors. Situations are often evaluated by the degree to which one situation resembles another situation. Kahneman, Daniel / Slovic, Paul / Tversky, Amos, Judgment under Uncertainty: Heuristics and Biases, 4. The employee might know about some legal rules that prohibit arbitrary discharges by employers, such as the anti-discrimination in employment rules in Title VII of the Civil Rights Act, the ADEA, and the ADA. These laws, being subject to much public discussion even on newspapers and TV, might also be more available and more easily retrievable to employees. Seeing some prohibitions of arbitrary behavior (e.g. unlawful discharge because of race) the employee might draw the conclusion that other arbitrary behavior (e.g. discharge because the employer does not like the employees brother) is also unlawful. Even if the discharge decisions seem similarly arbitrary, the law does not attach the same consequences to them.

The biggest distortion of the perception of the rights of employees can result from a combination of the above sources of bias. If cultural cognition leads to the predominant assimilation of information about a high level of employee rights, this information will tend to be more easily retrievable under the availability heuristic and than form the basis for comparison under the representativeness heuristic. This way only selected positive experiences, incidents or stories might be the source of evaluation of the lawfulness of the discharges presented in the study by Kim.

The conclusion that Kim draws from her study is that the assumption that employees bargain with employers in full knowledge about their rights does not reflect reality. This casts serious doubts on the argument that the prevalence of employment at will contracts in the real world represents the efficient outcome, reflecting the desires of the parties. Kim, 106, 155.

While I agree with that account, there is another conclusion one can draw from this study and its cognitive explanation behind it. One concern about the employment at will doctrine is that it is unfair and puts the employee at mercy of the employer’s arbitrariness. This will arguably result in a less motivated and therefore less productive workforce. One weakness of this argument is that market pressures constitute a check on arbitrary decisions. The economic self-interest of the employer will urge him to discharge people on economic grounds not and not for arbitrary reasons. But the study of Kim also casts some doubts on the conclusion that employment at will has a demotivating effect on the workforce. The results suggest that the employees feel a level of protection close to their desired protection even if that is not their legal status. Therefore, the employment at will doctrine might be a way to combine a content and motivated workforce with the maximum flexibility of the employer for his discharge decisions.

Governing the World by Law and Lottery?

pular support not only makes enforcement of international policies more difficult. It also increasingly results in violent protest against international organizations, as witnessed at meetings of the WTO, IMF, and the World Bank.

Reasons for the failures of international organizations can be found in principal-agents problems. The principals (the citizens of member states) have little control over the actions of their agents (the different international organizations). The delegation of competencies to international organizations provides no adequate procedures that ensure that the principals can influence the performance of their bureaucratic agents.

Increased transparency could solve the acceptance problem among the world citizen. However, knowledge about the different policies and the reasoning behind it alone does not bring better control over the agents due to the lack of political accountability of the international actors.

Also the more narrow and strict definition of the competencies of international organization as well as of the standards under which they act could tighten the grip on these bodies. This way the detection of failures and the distribution of responsibility for them would be easier. But this approach does not allow for the principals taking consequences out of the failures of their agents.

Stutzer and Frey (Making International Organizations More Democratic (2005), 1:3 Review of Law and Economics 305) propose increased citizen participation in international organizations in order to solve the acceptance problem. All citizens of member countries of an international organization should be given a potential right of participation in the organization’s decision-making by way of initiatives and referenda to change the ground rules of such organizations and by granting the right to recall high bureaucrats of these organizations. Since such direct democratic elements would encounter enormous transaction costs in large international organizations which cover up to billions of citizens, only a randomly selected sample of these citizens actually gets to exercise the above rights.

While random selection of voters seems arbitrary and uncertain, it gives every member of the potential electorate the same probability of being selected. Introducing quotas for nationalities, religions, genders, regions, or wealth levels would be complicated and bound to bias the selection of the voters.

The authors expect several improvements as a result of their proposal: Efficiency should be raised by effectively controlling higher public officials in international organizations. At the same time, influence of special interests in international governance should be weakened as citizens’ influence increases. Finally, collective decisions should become more self-enforcing, due to the strengthened legitimacy of international agreements.

While this seems to be an interesting approach, it remains doubtful that acceptance and support of international organizations will grow significantly after introducing such referendums and initiatives. Basic problems of international law - such as the difficulty of identifying and sanctioning violations of international law or the perceived partial immunity of powerful global players from international law - remain and will often frustrate people’s trust in the organizations administering that law. Finally, an increase of effectiveness of the work of international organizations by citizen participation requires a considerable level of education and access to information that is not ensured worldwide today.

Stutzer and Frey (Making International Organizations More Democratic (2005), 1:3 Review of Law and Economics 305) propose increased citizen participation in international organizations in order to solve the acceptance problem. All citizens of member countries of an international organization should be given a potential right of participation in the organization’s decision-making by way of initiatives and referenda to change the ground rules of such organizations and by granting the right to recall high bureaucrats of these organizations. Since such direct democratic elements would encounter enormous transaction costs in large international organizations which cover up to billions of citizens, only a randomly selected sample of these citizens actually gets to exercise the above rights.

While random selection of voters seems arbitrary and uncertain, it gives every member of the potential electorate the same probability of being selected. Introducing quotas for nationalities, religions, genders, regions, or wealth levels would be complicated and bound to bias the selection of the voters.

The authors expect several improvements as a result of their proposal: Efficiency should be raised by effectively controlling higher public officials in international organizations. At the same time, influence of special interests in international governance should be weakened as citizens’ influence increases. Finally, collective decisions should become more self-enforcing, due to the strengthened legitimacy of international agreements.

While this seems to be an interesting approach, it remains doubtful that acceptance and support of international organizations will grow significantly after introducing such referendums and initiatives. Basic problems of international law - such as the difficulty of identifying and sanctioning violations of international law or the perceived partial immunity of powerful global players from international law - remain and will often frustrate people’s trust in the organizations administering that law. Finally, an increase of effectiveness of the work of international organizations by citizen participation requires a considerable level of education and access to information that is not ensured worldwide today.

Foreclosure in Indonesia

A dispute between Deutsche Bank and Beckkett Pte Ltd, a Singapore registered group, gained attention among business people both in the western and in the eastern world. It involves one of the first cases following the Asia crisis in the late 90s in which a western creditor to an Indonesian real estate business was able to seize collateral and dispose of it. Therefore, the dispute is relevant both as a legal and as an economic and political issue.

The (undisputed) and simplified facts are as follows: In 1997 Deutsche Bank granted a bridging loan in an amount of $ 100m to a majority owned subsidiary of Beckkett called Asminco Bara Utama. The loan was intended to finance the expansion of Beckkett’s stake from 15% to 40% in Adora Indonesia, one of the largest Indonesian coal mines. The loan was secured by the 40% stake of Beckkett in Adora. Furthermore, Beckkett provided a guarantee. The following year, Asminco defaulted on the loan. After lengthy negotiations Deutsche Bank finally decided to foreclose on the shares and to sell them to another Indonesian business tycoon, Edwin Soeryadjaya, for $ 44.2m.

On February 21, 2006 Beckkett sued Deutsche Bank before the Singapore High Court asking to cancel the sale, return the shares as well as damages and payment for any lost dividends. First, Beckkett claims that Deutsche Bank was obliged under the loan agreement to raise a long term loan agreement when the bridge loan was due. Second, it alleges that Deutsche Bank disposed of the pledged shares at a too low price in order to wind up the guarantor, Beckkett.

Deutsche Bank, counterseeking the remaining amount that is still owed from the loan, both contests the alleged collusion with the buyer when selling the shares and its obligation to raise another loan fund. Moreover, it argues that Beckkett is only interested in the shares of the coal mine company as the price for Indonesian coal has risen significantly after the sale of the shares. With the recent upswing in global commodity prices, that stake is now estimated to be worth more than $400 million.

One Indonesian journalist reports on a blog that one of the parties invited six Indonesian journalists – not including him – to fly to Singapore paying for hotel, air tickets and meals to cover the trial (http://yosef-ardi.blogspot.com/2006/02/beckkett-vs-deutsche-bank-media-law.html). A day later, the journalist reports, an article on the trial was published in the newspaper Bisnis Indonesia. 80% of the article consisted of Beckkett’s arguments. For the journalist, it was clear which party invited the six journalists.

What makes the case so interesting for the business world is less its legal details. More important is its impact on the economic and political situation in the country.

First, Deutsche Bank’s reputation in the entire region is at stake. Critics of Deutsche Bank consider the case as an example of an over-enthusiastic global bank that provided the so called “tiger”-states with credit before the financial crisis of 1997 revealing the weak pillars on which the boom of those countries was founded at the time.

Second, a judgment against Deutsche Bank could be detrimental to Indonesia’s economy. International creditors, private equity investors and hedge funds follow the case closely which has been dogged by endless legal battles over document disclosure and marred by threats of intimidation and harassment. Wolfgang Topp, Deutsche Bank's Asia-Pacific managing director, talks of the bank “being literally held to ransom”, according to court documents. Topp says that he was interrogated by Indonesian police over allegations he was party to “deception or fraud” over the sale of the shares.

In the past, some questionable rulings against foreign investors did a lot of harm to the confidence of foreign investors in Indonesian judges to enforce contracts. The lack of legal recourse is widely considered as one of the major obstacles for foreign companies to invest in Indonesia. In case of a judgment against Deutsche Bank, Indonesia’s President, Susilo Bambang Yudhyono, will have a hard time to persuade foreign companies to invest in Indonesia, which is south-east Asia’s largest economy.

A verdict is not expected before next June.

First, Deutsche Bank’s reputation in the entire region is at stake. Critics of Deutsche Bank consider the case as an example of an over-enthusiastic global bank that provided the so called “tiger”-states with credit before the financial crisis of 1997 revealing the weak pillars on which the boom of those countries was founded at the time.

Second, a judgment against Deutsche Bank could be detrimental to Indonesia’s economy. International creditors, private equity investors and hedge funds follow the case closely which has been dogged by endless legal battles over document disclosure and marred by threats of intimidation and harassment. Wolfgang Topp, Deutsche Bank's Asia-Pacific managing director, talks of the bank “being literally held to ransom”, according to court documents. Topp says that he was interrogated by Indonesian police over allegations he was party to “deception or fraud” over the sale of the shares.

In the past, some questionable rulings against foreign investors did a lot of harm to the confidence of foreign investors in Indonesian judges to enforce contracts. The lack of legal recourse is widely considered as one of the major obstacles for foreign companies to invest in Indonesia. In case of a judgment against Deutsche Bank, Indonesia’s President, Susilo Bambang Yudhyono, will have a hard time to persuade foreign companies to invest in Indonesia, which is south-east Asia’s largest economy.

A verdict is not expected before next June.

Uncle Sam sticks his nose

On February 3, 2006, the Office of Foreign Assets Control (OFAC) of the United States Department of the Treasury, enforced an American statute in Mexican territory forcing Mexico City’s Sheraton Hotel, a Mexican company and subsidiary of a U.S. corporation (Starwood Hotels and Resorts Worldwide, Inc.), to expel a group of Cuban citizens out of the premises of the said hotel. The group of Cubans was staying at the hotel attending business meetings with executives of American companies. (1)

The OFAC administers and enforces economic and trade sanctions based on U.S. foreign policy and national security goals against targeted foreign countries, terrorists, international narcotics traffickers, and those engaged in activities related to the proliferation of weapons of mass destruction. (2)

The abovementioned episode was an extraterritorial application of “The Cuban Liberty and Democratic Solidarity Act” -also known as the Helms-Burton Act-. The Act was primarily designed by the U.S. Congress to inhibit foreign countries and U.S. corporations (or their subsidiaries based in third countries), from doing business in or with Cuba.

In fact, the Act expressly urges the President to encourage foreign countries to restrict trade and credit relations with Cuba.

The extraterritorial application of the Helms-Burton Act, had a major impact in Mexico’s political setting and raised the question: How far is the U.S. willing to go with the extraterritorial application of its public policy in order to pursue their international purposes?

As the Helms-Burton Act establishes, it was enacted in 1996 “to seek international sanctions against the Castro government in Cuba, to plan for support of a transition government leading to a democratically elected government in Cuba, and for other purposes”. (3)

In “Section. 2. Findings” of the Act, the American Congress listed some events that made the Cuban economy decline of at least 60 percent, as of 1996, being the first one in the list the end of Cuban subsidization by the former Soviet Union and 36 years of communist tyranny and economic mismanagement by the Castro Government.

Despite the problem that there is a clear absence of democracy in Cuba, which is not the main stream of this opinion, what I find questionable is the set of reasons or findings of the American Congress to enact and enforce the Statute. Section 2 of the Act addresses that “…(9) The United States has shown deep commitment, and considers it a moral obligation, to promote an protect human rights and fundamental freedoms…”.

On the other hand, the fact that the OFAC is enforcing U.S. laws abroad should not pass unnoticed by the international community, almost every country in the world has an American corporation (or subsidiary) within the limits of its territory, consequentially, they are a potential target for the OFAC’s arbitrary procedures.

Although the Helms-Burton Act has been criticized internationally since its enactment, the only countries that had designed specific countermeasures against its application has been ironically Mexico -Commerce and Investment Protection Act from Extraterritorial Enforcement of Foreign Law- and Canada -Foreign Extraterritorial Measures Act-.

I insist, “the ends doesn’t justify the means” the fact that the U.S. “moral obligation” to promote and protect human rights could be a reasonable cause, doesn’t give them “carte blanche” to run over foreign legal systems arbitrarily enforcing their public policy.

The extraterritorial application of the law must obey international treaties; diplomatic and judiciary channels are the obvious outset to interpret and resolve controversies between nations, we must condemn the unilateral decision of the Department of the Treasury of applying U.S. laws abroad.

The expansion of American freedom and form of democracy has struck the international scenario for decades in many ways, some reprehensible, some not; perhaps divine inspiration, moral obligation or the idea of “manifest destiny” is still shaping the decisions and measures of the OFAC’s officers, is it? Is just a question.

(1) Commercial activity with Cuba is forbidden for U.S. citizens and firms.
(2) http://www.ustreas.gov/offices/enforcement/ofac/mission
(3) Cuban Liberty and Democratic Solidarity (Libertad) Act of 1996, (Codified in Title 22, Sections 6021-6091 of the U.S. Code) P.L. 104-114, One Hundred Fourth Congress of the United States of America.