Debt Contracts

  • Choi, Stephen J., et al., 2025, "Swiss Cheese Contracts: The Costs of Creative Lawyering," SSRN Working Paper no. 5391281, September.

What do lawyers do? In theory they facilitate trade and reduce transaction costs. But anecdotal evidence in the market for syndicated loans—loans from a group of lenders to a single firm—suggests the opposite: Lawyers search contracts for loopholes to extract value from their counterparts. Hence, these lawyers act as rent extractors rather than transaction-costs reducers.

Economic theory would suggest that creditor-on-creditor violence would lead to a change in the terms in standard-form contracts to plug the loopholes. But that has not happened. The standard loan agreements remain "Swiss Cheese Contracts." Teams of specialist lawyers at the nation's top law firms compete with one another to devise creative ways to exploit the many loopholes in these highly complex loan documents.

The authors' explanation for this equilibrium is a breakdown of norms in the legal world with no consequences: an arms race of exploitive behavior. They write:

In many markets, contracts are not optimally designed instruments. Instead, they are historical artifacts, where, to understand them, we must not only know the history of how the contract has evolved, but the legal culture as well.

Financial Crises

  • Gorton, Gary B., and Jeffery Y. Zhang, 2025, "Why Financial Crises Recur," SSRN Working Paper no. 5317971, July.

My first Working Papers column was in the Summer 2010 issue of Regulation. It reviewed the work of Yale economist Gary Gorton to help understand the financial crisis of 2008–2009. Fifteen years later, Gorton believes policymakers continue to misunderstand financial crises. The GENIUS Act of 2025 requires that crypto stablecoins—crypto assets designed to have a stable value—be backed by cash or short-term treasuries. They are not covered by federal deposit insurance. But a portfolio of treasuries is subject to interest rate risk. Gorton and Zhang thus ask:

Suppose each stablecoin issuer holds only Treasuries in its portfolio. Now play out the shock that hit Silicon Valley Bank in 2023. If interest rates rise, then the value of the Treasuries—the assets meant to back the stablecoin's peg—will fall.

If this happens to all stablecoin issuers, then they will seek to buy new Treasuries that are of higher value. As bond prices fall, issuers will need to buy more Treasuries. When interest rates are sufficiently high and the value of Treasuries are sufficiently low, holders of stablecoins will have to decide if their issuer has the cash to buy more Treasuries. At that point, holders of stablecoins might ask questions about what is in the rest of their issuer's portfolio and if the issuer is able to hedge any risk. Once the "No Questions Asked" condition is violated, holders of stablecoins will begin to run.

Thus, instead of reducing financial risk, the GENIUS Act could contribute to it.

Business Dynamism

  • Mayo, John W., 2024, "The Report of My Death Was an Exaggeration: Business Dynamism in the United States," SSRN Working Paper no. 4950375, November.

Has there been an economically meaningful secular decline in the propensity to expand establishments and start new firms? The Business Establishment Entry Rate calculated by the US Census Bureau shows a declining trend since the 1970s.

But be careful when making inferences from ratios. For the entry rate ratio, the number of new establishments is divided by the total number of establishments. The numerator has been relatively stable over time because the number of new businesses each year in the United States has been fairly constant, but the denominator has been increasing because the total number of businesses has been growing. In other words, the lower rate of new establishments has been driven not by reduced entry, but by a growing base of establishments in the United States, which has largely been the result of the success (increased survival) of businesses over time. So, stories of declining US business dynamism are unsupported by these data.

Corporate Share Repurchase Tax

  • Autore, Don M., 2025, "Corporate Share Repurchases and the 2023 Excise Tax," SSRN Working Paper no. 4870874, August.

The Inflation Reduction Act of 2022 (IRA) enacted a 1 percent excise tax on the repurchase of shares by corporations. The rationale was to induce firms to invest more of their cash rather than distribute it to shareholders through buybacks.

In response to the tax, repurchases declined by 20 percent, from around $1 trillion in 2022 to just over $800 billion in 2023. Some of this money still went to shareholders: The authors find a modest increase in dividends, roughly one-quarter as large as the reduction in buyback spending, which means a substantial overall decline in shareholder payout. However, the IRA didn't induce the wave of business investment that lawmakers envisioned: The authors find that the remainder was instead retained as cash.

Policy toward Small Business

  • Feinstein, Brian D., 2025, "Small Business Favoritism," SSRN Working Paper no. 5375532, August.

This article compiles a comprehensive list of small business exemptions from laws and regulations; more than 1,300 statutory provisions confer legal advantages on small firms.

In rank order, 415 provisions provide training, counseling, and technical assistance, 300 provide loans or grants, 263 establish special government contracting provisions, 138 are regulatory exemptions, 92 provide support for research and development, 67 assist international trade, and 36 reduce taxes.

The rationale for these exemptions is economies of scale in complying with government rules: Large firms are much better positioned to comply. The author argues that small business exemptions should be replaced with much less regulation and no exemptions, thereby mirroring economists' recommendations about taxes: Broaden the base and lower the rate.