Thursday, September 17, 2009

Ask Your Teachers For a Rebate

Ian Ayres

Crosspost from Freakonomics:

On Tuesday, I handed out more than $150 to my “small group” of Contracts students. It was a strange moment — pulling out your wallet and passing out cash. But I did it because I assigned my contracts casebook and I’m trying to reduce the financial conflict of interest that professors have in assigning their own books. I wrote about doing this in a 2005 New York Times Op-Ed:

[A]t the moment, professors’ incentives in choosing textbooks are in some ways more distorted than doctors’ incentives in choosing drugs. You see, I earn a $10.30 royalty on every copy of my textbook that a student buys. Instead of just trying to get the best book for my class (and to do so I should weigh both quality and price), I might also consider assigning my own book and increasing my profit.

This is a self-dealing transaction, which would be presumptively illegal if professors owed a fiduciary duty to students. Some professors realize this and donate to charity the royalties they earn when they assign students their own books.

So this year, I am going to do something different. I will give $11 to each of my contracts students who buys my book. That way, we will all know that I assigned the book for the right reason.

Rebating the money this year was a great excuse to discuss whether any of the students had a valid promissory estoppel claim against me. In 2005, I said “this year, I am going to … .” Does that promise cover all future contracts and non-contracts Ayres classes? Do I need to pay students who bought used textbooks or bought before they heard of the offer?

In retrospect, I wish I had softened one claim from the Op-Ed: “That way, we will all know that I assigned the book for the right reason.” Disgorging the $11 reduces the conflict, but I still have plenty of self-serving reasons to favor my own work over others. Still, disgorgement is a simple way to reduce the appearance of impropriety.

I was surprised to learn that the Yale Daily News picked up the issue yesterday. One of my university colleagues, in defending his decision not to rebate royalty to his students, noted “that roughly 90 to 95 percent of his book royalties are from books that are not assigned in Yale courses.” This suggests that his books have passed a market test.

Then again, he would only be forfeiting 5 to 10 percent of his book royalties by rebating those paid by his own students. And the more relevant market test is what proportion of other professors choose his book. If only 5 percent of the professors without a financial incentive assign his textbook, then there is more of an appearance that the financial payoff played an inappropriate contributing role.

I’m delighted to report that one of my Yale colleagues emailed me yesterday to say that he was going to join me in rebating his royalty to his students. We are not alone.

When I originally published the Op-Ed, I received dozens of emails from professors around the country indicating that they disgorge their royalty. So students, if your professor has asked you to buy his or her book, ask for a rebate. A small way to make professors more sensitive about the price of the books they are assigning is to think about the royalties they are generating for themselves.

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