Economic theory is clear about the advantages and disadvantages of various ways of regulating negative externalities, such as command and control, cap and trade, taxation, subsidies, and tort law. Yet public policy rarely follows the recommendations that follow from the theory. For example, the standard recommendations for reducing CO2 emissions involve carbon taxes or some form of cap and trade, but discussions of "realistic" ways to reduce emissions in the U.S. have involved mileage standards, command and control regulation of power plants, and tax subsidies for energy efficiency. In democracies such as the U.S., policies must have at least some public support. Citizens' limited understanding of the economics of regulation can lead to lack of support for optimal policies. In studies on the World Wide Web, we document some failures, and some successes, of ordinary citizens to think through the economics of alternative policies. Among other issues, we examine understanding of the secondary effects of taxation vs. subsidies, and understanding of the role of limited information (on the part of polluters, or governments) in the choice between command-and-control regulation and tort law or taxation.

On March 29, 2010, the U.S. Supreme Court signaled its intention to geographically limit the reach of the U.S. securities antifraud regime and thus differentially exclude U.S.-listed foreign firms from the ambit of formal U.S. antifraud enforcement. We exploit this legal surprise as a natural experiment to test the legal bonding hypothesis—namely, to assess firms' ability to use other countries' enforcement institutions as institutional substitutes and, more broadly, to assess the value of the U.S. legal enforcement mechanism. This event nonetheless was met with positive or indifferent market reactions using Brown-Warner, matched samples, and portfolio analyses. We also observe little change in the price premium for U.S.-traded equities, bid-ask spreads, or the proportion of U.S. trading volume. These results challenge the view of at least the U.S. civil liability regime, as currently designed, as a source of value for such firms and warrant closer examination of the operation of formal enforcement institutions.

This case examines whether multinationals have a potential competitive weapon in aggressively exploiting social schisms in host labor markets and in hiring and promoting senior managers from excluded groups.