Volume 61, Issue 3 Page 629 Stanford Law Review LEGISLATIVE THREATS Guy Halfteck © 2008 by the Board of Trustees of the Leland Stanford Junior University, from the Stanford Law Review at 61 STAN. L. REV. 629 (2008). For information visit http://lawreview.stanford.edu. HALFTECK 61 STAN.L.REV. 629 CORRECTED 2/8/2009 7:48 PM LEGISLATIVE THREATS Guy Halfteck* This Article introduces a theory of legislative threats that not only pierces the fundamental construction of the legal system as a social regulatory institution but, more fundamentally, shows that the conventional wisdom on the role of the legal system in achieving and maintaining social order cannot explain how modern social control actually works. Contrary to received wisdom, the theory demonstrates that the threat of legislation—rather than legislation itself—plays a remarkable role in controlling behavior, in creating and setting incentives, and in maintaining social order. Conceptually, legislative threats encompass threats that legislators exert on target entities—including banks and financial institutions, manufacturing corporations, professions, industrial sectors and trade bodies, universities and other public institutions, and federal agencies and U.S. states—according to which the legislator will exercise her legislative power and enact adverse legislation to regulate the conduct in question unless the threat recipients modify their conduct in line with the legislator’s demands. Implicit in the threat is the inverse promise that the legislator will forgo the threatened legislation if, and only if, threat recipients duly meet these demands. The Article examines ten case studies drawn from diverse areas of social policy, which demonstrate both the pervasive use of threats and their formidable regulatory capacity. The Article also offers an analytic taxonomy that delineates the conceptual boundaries of legislative threats and enhances the precision of the analytic inquiry: this taxonomy includes explicit, implicit, and anticipatory legislative threats. The Article borrows tools and insights from the field of game theory to model the strategic interaction between legislators and target firms as a noncooperative game. This model yields clear and insightful predictions regarding the inducement effect of legislative threats—namely, the capacity of legislative threats to induce target entities to modify their behavior so as to avert the risk and consequences of the threatened legislation. The inducement effect, it is shown, depends on: (i) the credibility condition—namely, whether threat recipients believe that the threat is credible or, rather, mere “cheap talk”; and * General Counsel, Solow Realty & Development Company, LLC, New York, New York. S.J.D., Harvard University (2003); LL.M., Columbia University (2000); LL.B., Hebrew University (1998). I wish to thank Alex Stein for his insightful comments, astute advice and unwavering support. I also wish to thank Jessica Eisenthal for her meticulous editing of this Article as well as the editors of the Stanford Law Review for their thorough review and excellent substantive comments and proposals. The opinions expressed in this Article—as well as any errors—are mine. 629 HALFTECK 61 STAN.L.REV. 629 CORRECTED 2/8/2009 7:48 PM 630 STANFORD LAW REVIEW [Vol. 61:629 (ii) the effectiveness condition—that is, whether the perceived probability that the threatened legislation will be enacted into law is sufficiently high. The analysis also demonstrates how legislators’ commitments, reputation, and motivations affect the credibility of threats and, consequently, their inducement effect on the conduct of target firms. Because threats are often directed towards groups as a whole (rather than to a single firm), the Article explains the counterintuitive effects of strategic interaction within groups on compliance with such threats (giving special attention to homogenous or heterogeneous as well organized or unorganized ones). In this respect, the Article develops the claim that compliance with legislative threats is, essentially, an informal political bargain in which a legislator barters the non-use of legislative power (with respect to a particular issue) in return for firms’ commitment to change their conduct. Thus, by focusing on bargaining in the shadow of legislative threats, the Article identifies two important, interrelated effects: (i) exerting legislative threats elicits valuable information from target entities, which in turn reduces transaction costs, facilitates efficient regulatory bargaining, and decreases the contractual incompleteness of the regulatory bargain; and (ii) regulatory bargaining provides an opportunity to craft superior measures that are necessary to effectively address the issues initially targeted by the legislator’s threat. Overall, legislative threats encompass a powerful, innovative mechanism that legislators and regulators frequently employ as a means for exercising their institutional mandate to control social conduct and effect public policy. The emergence and prevalence of legislative threats therefore appear to be driven by the unprecedented functional challenges that modern legislators confront as they try to maintain social order in a highly dynamic social reality. Hence, this spontaneous solution seems to have emerged as a response to the functional limits of the law and the systemic failures of lawmakers. Further, the ever- increasing use of legislative threats represents a trend towards second-order social control where legislators, rather than dictating first-order rules of conduct, opt for second-order rules designed to create the incentives necessary to induce firms and groups to devise desirable social control measures on their own. Inevitably, this trend is bound to diminish the extensive role that the regulatory state has traditionally performed in directing social and economic life and, at the same time, increase the power of groups. INDEX OF FIGURES AND TABLES ............................................................................631 INTRODUCTION.......................................................................................................631 I. THE CONVENTIONAL WISDOM ON SOCIAL CONTROL .......................................639 II. LEGISLATIVE THREATS AS REGULATORS OF CONDUCT ...................................645 A. Legislators and the Reality of Legislative Business ...................................645 1. Cybersecurity ......................................................................................648 2. E-piracy...............................................................................................649 3. Digital obscenity .................................................................................651 4. Executive compensation......................................................................651 5. Money laundering ...............................................................................652 6. Toxic-waste recycling..........................................................................653 7. Greenhouse-gas emissions..................................................................654 8. Automobile air pollution .....................................................................655 HALFTECK 61 STAN.L.REV. 629 CORRECTED 2/8/2009 7:48 PM December 2008] LEGISLATIVE THREATS 631 9. Commercial leases ..............................................................................655 10. Illegal substances................................................................................656 B. An Analytic Taxonomy of Legislative Threats............................................657 1. Explicit legislative threats...................................................................658 2. Implicit legislative threats...................................................................659 3. Anticipatory legislative threats ...........................................................661 III. HOW DO LEGISLATIVE THREATS REGULATE SOCIAL CONDUCT AND INDUCE SOCIAL CHANGE?................................................................................663 A. A Game-Theoretic Model of Legislative Threats .......................................665 1. The rules of the game ..........................................................................666 2. The information structure of the game................................................667 3. The game’s underlying assumptions ...................................................668 4. A game-tree representation.................................................................671 B. The Model’s Predictions ............................................................................671 1. Predicting the players’ equilibrium behavior .....................................673 2. Refining the predictions: Incorporating the notion of probabilistic threats .................................................................................................675 3. Extending the analysis to games with perfect and imperfect information..........................................................................................680 IV. CREDIBILITY AND THE INDUCEMENT EFFECT OF LEGISLATIVE THREATS ........687 A. The Role of Commitments...........................................................................689 B. The Role of Reputation...............................................................................692 C. The Role of Emotions .................................................................................695 V. THE EFFECTS