Does Copyright Make Books Disappear?

Copyright law has two main economic justifications. One is familiar—the idea that copyright promotes the production of creative work by ensuring that creators, and not copyists, gain the value of their creations. Yet production is not enough, since works also need to be distributed over time. And here lays the second main justification: copyright’s power does not end at the moment of creation, but instead provides a continuing incentive for creators (or their financial backers) to distribute and market works. Absent that incentive, creative works will not be readily available to the public.

In a fascinating new paper (available on SSRN) by Paul Heald analyzes this second claim. Here is a snippet from the introduction. We've bolded the most striking part of the study:

Influential copyright lobbyists presently circle the globe advocating ever longer terms of copyright protection based on this under-exploitation hypothesis--that bad things happen when a copyright expires, the work loses its owner, and it falls into the public domain. By analyzing present distribution patterns of books and music, this article tests the assumption that works will be under-exploited unless they are owned and therefore questions the validity of arguments in favor of copyright term extension… 

[Our research] collects data from a random selection of new editions for sale on www.amazon.com (“Amazon”) and music found on new movie DVD’s for sale on Amazon. By examining what is for sale “on the shelf,” the analysis of this data reveals a striking finding that directly contradicts the under-exploitation theory of copyright: Copyright correlates significantly with the disappearance of works rather than with their availability. Shortly after works are created and proprietized, they tend to disappear from public view only to reappear in significantly increased numbers when they fall into the public domain and lose their owners. For example, more than twice as many new books originally published in the 1890’s are for sale by Amazon than books from the 1950’s, despite the fact that many fewer books were published in the 1890’s.

The Telltale Signs of Corporate Fraud

A new working paper (abstract; PDF) by Tanja Artiga Gonzalez, Markus Schmid, and David Yermack looks for the telltale signs of corporate fraud. The paper is called "Smokescreen: How Managers Behave When They Have Something To Hide":

We study financial reporting and corporate governance in 216 U.S. companies accused of price fixing by antitrust authorities.  We document a range of strategies used by these firms when reporting financial results, including frequent earnings smoothing, segment reclassification, and restatements.  In corporate governance, cartel firms favor outside directors who are likely to be inattentive monitors due to their status as foreign or "busy." When directors resign, they are often not replaced, and new auditors are rarely engaged.  Cartel managers exercise their stock options faster than managers of other firms.  While our results are based only upon firms engaged in price fixing, we expect that they should apply generally to all companies in which managers seek to conceal poor performance or personal wrongdoing.

The authors are wise to note that these findings aren't necessarily generalizable, and it is also worth wondering if this method could be applied prophylactically to identify fraud. Note: Yermack is the same man who brought us "Tailspotting: How Disclosure, Stock Prices and Volatility Change When CEOs Fly to Their Vacation Homes."

Why Is Failure a Sign of a Healthy Economy? A Guest Post by Tim Harford

I've known Tim Harford for a while; to me, he's one of the best writers who also happens to be an economist (although in recent years he's spent more time as a writer than a practicing economist, which may explain everything). Disclosure: Harford profiled Steve Levitt back when Freakonomics came out, and he's had the two of us on his BBC radio show More or Less.

He writes a Financial Times column (on Saturdays) called "Undercover Economist," and that was the title of his first book, published in 2005 (and just updated). His latest book, out this week, is called Adapt: Why Success Always Starts with Failure. It examines the incremental, adaptive ways by which success is achieved across a number of fields. Here's a taste, in the form of a guest post. It's very good, and to my mind, here's the best passage:

[W]here’s the churn in education policy or healthcare policy or policing? These are difficult problems. Why would we expect them to be solved the first time? They are surely no simpler than the business problems which seem so prone to experiment and error.

The FREAK-est Links

New study tries to predict sources of future pandemics. (Earlier) “The Subprime Primer”: a mortgage crisis in illustration. What’s the worst company in America? Cast your vote. The white lies of Consumer Reports‘s undercover shoppers.