Auctioning fees and legal damages – an appropriate treatment for the auction houses???

This article in NY Times highlights the case when a federal judge (Kaplan) gave final approval yesterday to a $512 million settlement of the lawsuit against the Sotheby’s and Christie’s auction houses by customers who said they were cheated in a price-fixing conspiracy that lasted several years.

The interesting aspect of this case from a game theory point of view was how In this class action, U.S. District Judge Lewis Kaplan sought bids from leading law firms on fees they would charge the plaintiffs, looking to tap a qualified firm at the lowest cost to the class. After receiving the bids from about 20 firms, Judge Kaplan appointed Boies, Schiller, which wasn’t involved in the case at the start, as lead counsel in May.” Read this article here.

The anatomy-of-the-rise-and-fall-of-a-pricefixing article illustrates all the events from start to finish in a very compehensive manner.

Following is the description of how the law firm was chosed based on bids from various parties, the following text has been taken from page 515, Microeconomics 7th Ed by Pindyck & Rubinfeld:

Judge Kaplan entertained secret bids from 20 Law Firms. Each firms was told to offer a fee arrangement consisting of a base and a percentage. A settlement or trial award at or below the base would be given entirely to the plaintiffs, with the law firm receiving nothing. If the settlement or award was higher than the base, the law firm would receive the stated percentage of the amount over the base. Many attorneys operate under a contingent fee system in which they offer a base of zero and expect to receive one-third of the award.

The winning bid was the law firm of Boies, Schiller & Flexner, which bid a base of $405 million and a percentage of 25% to be earned on any award above $405 million. Some of the losing bidders were outraged that BSF had bid so high to get the business. Indeed, some suggested that the firm might not work hard in the plaintiff’s interest because the minimum might be unachievable. Prior to the bidding, observers expected the case to generate a settlement of $130 million. In the end, it appears that Judge Kaplan, the plaintiff’s class, and BSF were all winners. Months after taking on the case, BSF settled with defendants for $512 million, earning the attorney’s a $26.75 million fee (25% of excess of base) and generating just over $475 million for the class members.

Vamsi Duvvuri

MBA Class of 2009

Goizueta Business School

New Year Resolutions & SDA

Why make New Year’s resolutions? If you need to start a diet or get up earlier in the morning, why wait until Jan. 1? Why not do it today? New Year’s resolutions do not make any rational sense.

While perfectly logical, that analysis misses the point. New Year’s resolutions help people cope with some of the most difficult conflicts human beings face.

So argues one of the economics profession’s greatest experts on conflict, the Noble Prize Winner Thomas C. Schelling, in the words of the citation, “having enhanced our understanding of conflict and cooperation through game-theory analysis.”

One of his best-known ideas is “precommitment.” One party in a conflict, he demonstrated, can often strengthen its strategic position by cutting off some of its options to make its threats more credible. An army that burns its bridges, making retreat impossible, is a classic military example.

Others involve strong diplomatic commitments. By passing a law saying the United States will defend Taiwan if it is attacked, for example, Congress gives future administrations less flexibility in dealing with a crisis, but the threat makes an attack less likely.

“What I have in mind is an act or decision that a person takes decisively at some particular point in time, about which the person’s preferences differ from what they were earlier, when the prospect was contemplated but the decision was still in the future,” he wrote in “Ethics, Law and the Exercise of Self-Command. If the person could make the final decision about that action at the earlier time, precluding a later change in mind, he would make a different choice from what he knows will be his choice on that later occasion.”

New Year’s resolutions help the earlier self overrule the later one by raising the cost of straying. “More is threatened by failure than just the substance of the resolution: one’s personal constitution is violated, confidence demoralized, and the whole year spoiled. At least one can try to make it so,” wrote Professor Schelling in “The Intimate Contest for Self-Command,” a 1980 essay in his book “Choice and Consequence: Perspectives of an Errant Economist” (Harvard University Press, 1984).

As many a broken resolution demonstrates, those consequences often are not a big enough deterrent. To make success more likely, Professor Schelling’s work suggests a few additional strategies.

One is a mild precommitment: not keeping sweets or tobacco in the house, for instance. At the very least, this step forces you to delay indulgence until you can go to the store – and allows time to recover your resolve.

Another approach is to use bright-line rules, which make it harder to cheat through clever reinterpretation. That may explain why many people find it easier to eliminate whole categories of food, like carbohydrates, rather than simply to cut back on calories.

“Just as it may be easier to ban nuclear weapons from the battlefield in toto than through carefully graduated specifications on their use, zero is a more enforceable limit on cigarettes or chewing gum than some flexible quantitative ration,” Professor Schelling wrote.