• Selected
• Entire List

Abstract:
Despite the apparent divergence in institutions of governance, share ownership, capital markets, and business culture across developed economies, the basic law of the corporate form has already achieved a high degree of uniformity, and continued convergence is likely. A principal reason for convergence is a widespread normative consensus that corporate managers should act exclusively in the economic interests of shareholders, including noncontrolling shareholders. This consensus on a shareholder-oriented model of the corporation results in part from the failure of alternative models of the corporation, including the manager-oriented model that evolved in the U.S. in the 1950's and 60's, the labor-oriented model that reached its apogee in German co-determination, and the state-oriented model that until recently was dominant in France and much of Asia. Other reasons for the new consensus include the competitive success of contemporary British and American firms, the growing influence worldwide of the academic disciplines of economics and finance, the diffusion of share ownership in developed countries, and the emergence of active shareholder representatives and interest groups in major jurisdictions. Since the dominant corporate ideology of shareholder primacy is unlikely to be undone, its success represents the "end of history" for corporate law.

The ideology of shareholder primacy is likely to press all major jurisdictions toward similar rules of corporate law and practice. Although some differences may persist as a result of institutional or historical contingencies, the bulk of legal development worldwide will be toward a standard legal model of the corporation. For the most part, this development will enhance the efficiency of corporate laws and practices. In some cases, however, jurisdictions may converge on inefficient rules, as when the universal rule of limited shareholder liability permits shareholders to externalize the costs of corporate torts.

Abstract:
This article is the first chapter of "The Anatomy of Corporate Law: A Comparative and Functional Approach." The book as a whole provides a functional analysis of corporate (or company) law in Europe, the U.S., and Japan. Its organization reflects the structure of corporate law across all jurisdictions, while individual chapters explore the diversity of jurisdictional approaches to the common problems of corporate law.

As the book's introductory chapter, this article describes the functions and boundaries of corporate law. We first detail the economic importance of the corporate form's hallmark features: legal personality, limited liability, transferable shares, delegated management, and investor ownership. We then identify the major agency problems that attend the corporate form, and that, therefore, corporate law must address: conflicts between managers and shareholders, between controlling and minority shareholders, and between shareholders as a class and non-shareholder constituencies of the firm such as creditors and employees. In our view, corporate law serves in part to accommodate contract and property law to the corporate form and, in substantial part, to address the agency problems that are associated with this form. Corporate law includes not only the law of public and private companies (such as the German GmbH and the French SARL) but also much of what is traditionally considered to be securities regulation. Each of these bodies of law safeguards the scope of business discretion for corporate controllers while also restricting this discretion where the risk of opportunism vis-a-vis shareholder and non-shareholder constituencies is particularly acute.

In addition to Chapter 1, Chapter 2 of the Anatomy of Corporate Law, "Strategies for Mitigating Agency Problems" will be available (full text) on the SSRN.

The abstracts for Chapter 3: The Basic Governance Structure; Chapter 4: Creditor Protection; Chapter 5: Related Party Transactions; Chapter 6: Significant Corporate Actions; Chapter 7: Control Transactions; Chapter 8: Issuers and Investor Protection; Chapter 9: Beyond the Anatomy will also be available on the SSRN.

Corporation, agency problem, corporate law, corporate regulation, corporate governance, securities law, limited liability

Abstract:
In every developed market economy, the law provides for a set of standard form legal entities. In the United States, these entities include, among others, the business corporation, the cooperative corporation, the nonprofit corporation, the municipal corporation, the limited liability company, the general partnership, the limited partnership, the private trust, the charitable trust, and marriage. To an important degree, these legal entities are simply standard form contracts that provide convenient default terms for contractual relationships among the owners, managers, and creditors who participate in an enterprise. In this essay we ask whether organizational law serves, in addition, some more essential role, permitting the creation of relationships that could not practicably be formed just by contract.

The answer we offer is that organizational law goes beyond contract law in one critical respect, permitting the creation of patterns of creditors' rights that otherwise could not practicably be established. In part, these patterns involve limits on the extent to which creditors of an organization can have recourse to the personal assets of the organization's owners or other beneficiaries - a function we term "defensive asset partitioning." But this aspect of organizational law, which includes the limited liability that is a familiar characteristic of most corporate entities, is of distinctly secondary importance. The truly essential function of organizational law is, rather, "affirmative asset partitioning." In effect, this is the reverse of limited liability: it involves shielding the assets of the entity from the creditors of the entity's owners or managers. Affirmative asset partitioning offers efficiencies in bonding and monitoring that are of singular importance in constructing the large-scale organizations that characterize modern economies. Surprisingly, this crucial function of organizational law - which is essentially a property-law-type function - has largely escaped notice, much less analysis, in both the legal and the economics literature.

Asset partitioning, legal entities, limited liability, property rights

Abstract:
In every developed market economy, the law provides for a set of standard form legal entities. In the United States, these entities include, among others, the business corporation, the cooperative corporation, the nonprofit corporation, the municipal corporation, the limited liability company, the general partnership, the limited partnership, the private trust, the charitable trust, and marriage. To an important degree, these legal entities are simply standard form contracts that provide convenient default terms for contractual relationships among the owners, managers, and creditors who participate in an enterprise. In this essay we ask whether organizational law serves, in addition, some more essential role, permitting the creation of relationships that could not practicably be formed just by contract.

The answer we offer is that organizational law goes beyond contract law in one critical respect, permitting the creation of patterns of creditors' rights that otherwise could not practicably be established. In part, these patterns involve limits on the extent to which creditors of an organization can have recourse to the personal assets of the organization's owners or other beneficiaries ? a function we term "defensive asset partitioning." But this aspect of organizational law, which includes the limited liability that is a familiar characteristic of most corporate entities, is of distinctly secondary importance. The truly essential function of organizational law is, rather, "affirmative asset partitioning." In effect, this is the reverse of limited liability: it involves shielding the assets of the entity from the creditors of the entity's owners or managers. Affirmative asset partitioning offers efficiencies in bonding and monitoring that are of singular importance in constructing the large-scale organizations that characterize modern economies. Surprisingly, this crucial function of organizational law ? which is essentially a property-law-type function ? has largely escaped notice, much less analysis, in both the legal and the economics literature.

Abstract:
This study elucidates the origins of entityshielding, a term that refers to rules that protect a firm's assets from thepersonal creditors of its owners. Following a discussion of the economicbenefits and costs of entity shielding, a survey of four Western commercialsocieties (ancient Rome, medieval and Renaissance Italy, early modern England,and the contemporary United States) is conducted in order to trace theevolution of entity shielding. Although Roman law used entity shielding sparingly, medieval Italy embracedweak entity shielding while resisting strong shielding for general-purposecommercial firms due to cost factors. In seventeenth-century England, theexpanding jurisdiction of nationwide courts andthe development ofpartnership and trust law led to the rise of entity shielding under Englishlaw. In the United States today, a confluence of legal, accounting, and valuationdevelopments has made the costs of protecting creditors and owners manageablefor even the smallest limited liability companies and closely heldcorporations. Clearly, cost factors have played a prominent role in thedevelopment of entity shielding throughout Western history.(SAA)

Legal protection, Limited liability companies (LLC), Asset management, Firm ownership, Legal systems

Abstract:
Organizational law empowers firms to hold assets and enter contracts as entities that are legally distinct from their owners and managers. Legal scholars and economists have commented extensively on one form of this partitioning between firms and owners: namely, the rule of limited liability that insulates firm owners from business debts. But a less-noticed form of legal partitioning, which we call entity shielding, is both economically and historically more significant than limited liability. While limited liability shields owners' personal assets from a firm's creditors, entity shielding protects firm assets from the owners' personal creditors (and from creditors of other business ventures), thus reserving those assets for the firm's creditors. Entity shielding creates important economic benefits, including a lower cost of credit for firm owners, reduced bankruptcy administration costs, enhanced stability, and the possibility of a market in shares. But entity shielding also imposes costs by requiring specialized legal and business institutions and inviting opportunism vis-à-vis both personal and business creditors. The changing balance of these benefits and costs helps explain the evolution of legal entities across time and societies. To both illustrate and test this proposition, we describe the development of entity shielding in four historical epochs: ancient Rome, the Italian Middle Ages, England of the 17th-19th centuries, and the United States from the 19th century to the present.

Abstract:
Organizational law empowers firms to hold assets and enter contracts as entities that are legally distinct from their owners and managers. Legal scholars and economists have commented extensively on one form of this partitioning between firms and owners: namely, the rule of limited liability that insulates firm owners from business debts. But a less-noticed form of legal partitioning, which we call "entity shielding," is both economically and historically more significant than limited liability. While limited liability shields owners' personal assets from a firm's creditors, entity shielding protects firm assets from the owners' personal creditors (and from creditors of other business ventures), thus reserving those assets for the firm's creditors. Entity shielding creates important economic benefits, including a lower cost of credit for firm owners, reduced bankruptcy administration costs, enhanced stability, and the possibility of a market in shares. But entity shielding also imposes costs by requiring specialized legal and business institutions and inviting opportunism vis-a-vis both personal and business creditors. The changing balance of these benefits and costs helps explain the evolution of legal entities across time and societies. To both illustrate and test this proposition, we describe the development of entity shielding in four historical epochs: ancient Rome, the Italian Middle Ages, England of the 17th-19th centuries, and the United States from the 19th century to the present.

Corporations, Partnerships, Companies, History of the Firm, Entity Shielding, Limited Liability, Legal Entities, Bankruptcy

Abstract:
This article is the second chapter of a book authored by R. Kraakman, P. Davies, H. Hansmann, G. Hertig, K. Hopt, H. Kanda, and E. Rock, "The Anatomy of Corporate Law: A Comparative and Functional Approach," (Oxford University Press 2004). The book as a whole provides a functional analysis of corporate (or company) law in Europe, the U.S., and Japan. Its organization reflects the structure of corporate law across all jurisdictions, while individual chapters explore the diversity of jurisdictional approaches to the common problems of corporate law.

"Agency Problems and Legal Strategies" establishes the analytical framework for the book as a whole. After further elaborating the agency problems that motivate corporate law, this chapter identifies five legal strategies that the law employs to address these problems. Describing these strategies allows us to more accurately map legal similarities and differences across jurisdictions. Some legal strategies are "regulatory" insofar as they directly constrain the actions of corporate actors: for example, a standard of behavior such as a director's duty of loyalty and care. Other legal strategies are "governance-based" insofar as they channel the distribution of power and payoffs within companies to reduce opportunism. For example, the law may accord direct decision rights to a vulnerable corporate constituency, as when it requires shareholder approval of mergers. Alternatively, the law may assign appointment rights over top managers to a vulnerable constituency, as when it accords shareholders - or in some jurisdictions, employees - the power to select corporate directors. Finally, the law may attempt to shape the incentives of managers or controlling shareholders, as when it regulates compensation or prescribes an equal treatment norm such as the rule that dividends must be paid out ratably.

In addition to Chapter 2, Chapter 1 "What is Corporate Law" is available in full text on the SSRN at http://ssrn.com/abstract=568623.

The abstracts for Chapter 3: The Basic Governance Structure; Chapter 4: Creditor protection (http://ssrn.com/abstract=568823); Chapter 5: Related Party Transactions; Chapter 6: Significant Corporate Actions; Chapter 7: Control Transactions; Chapter 8: Issuers and Investor Protection; Chapter 9: Beyond the Anatomy are also/will be available on the SSRN.

Agency, agency cost, agency problem, appointment rights, decision rights, control rights, regulation, corporate governance, equal treatment, trustee, mandatory disclosure

Abstract:
The law of every jurisdiction defines a set of well-recognized forms that property rights can take, and burdens the creation of property rights that deviate from those conventional forms. In this respect, property law differs from contract law, which generally leaves parties free to craft contractual rights in any form they wish.

The law's restrictions on the forms of property rights have recently been rationalized as establishing an "optimal standardization" of property rights into a limited number of discrete forms to facilitate communication of the content of those rights to third parties. We argue, in contrast, that the law's limitations on property rights take the form, not of standardization, but rather of regulation of the notice required to establish different types of property rights. These limitations serve, not to facilitate communication of the content of rights, but to facilitate verification of ownership of the rights offered for conveyance. Property law generally addresses this verification problem by presuming that all property rights in an asset are held by a single owner, subject to the exception that a division of rights is enforceable if there is adequate notice to subsequent owners. Because the benefits of divided property rights are often low and the costs of verifying those rights are often high, property law takes an unaccommodating approach to all but a few basic categories of partial property rights.

In the course of developing our analysis, we offer a simple and clear characterization of the distinction between property rights and contract rights. We explore the varieties of verification rules by which the law establishes the forms of notice required to establish property rights, and illustrate the close relationship between verification rules and the forms of property rights that those rules support. We set out conditions for assessing the efficiency of alternative property rights regimes, and discuss the extent to which that efficiency calculus is actually reflected in property law. We survey some of the principal categories of partial property rights - including security interests, legal entities, coordinating rights in real and personal property, and intellectual property - showing how the structure of those rights reflects limits on the feasible verification rules. We also seek to clarify the relationship between property rights and contract rights, the connection between property rights and property rules, and the limits on specific performance as a remedy in contract.

property, contract, property rights, contract rights, verification, notice, numerus clausus

Abstract:
Publicly traded corporations rarely use the nearly absolute freedom afforded them to draft charters that deviate from the default terms of state corporation law. Conventional explanations for this phenomenon are unconvincing. A more promising explanation lies in the lack of any feasible amendment mechanism that will assure efficient adaptation of charter terms as changing circumstances dictate during the long expected lifetime of a public corporation. In effect, by adopting state law default terms, corporations delegate to the state the process of amending charter provisions over time.

Abstract:
Publicly traded corporations rarely use the nearly absolute freedom afforded them to draft charters that deviate from the default terms of state corporation law. Conventional explanations for this phenomenon are unconvincing. A more plausible reason lies in the lack of any feasible amendment mechanism that will assure efficient adaptation of charter terms as changing circumstances dictate during the long expected lifetime of a public corporation. In effect, by adopting state law default terms, corporate shareholders and managers delegate to a third party - the state - the process of amending charter provisions over time. This theory provides much stronger reason for deferring to the law's default rules than do the other theories that have been offered. It implies that default rules may often be nearly as influential as mandatory rules, and that scholars are not wasting their time debating whether one rule of corporate law is more desirable than another even if, as is typical, the rule chosen will be formulated only as a default. This theory also suggests that it might be beneficial if leading corporate law jurisdictions were to provide greater choice among default terms than they currently do.

Abstract:
This article is the first chapter of the second edition of The Anatomy of Corporate Law: A Comparative and Functional Approach, by Reinier Kraakman, John Armour, Paul Davies, Luca Enriques, Henry Hansmann, Gerard Hertig, Klaus Hopt, Hideki Kanda and Edward Rock (Oxford University Press, 2009). The book as a whole provides a functional analysis of corporate (or company) law in Europe, the U.S., and Japan. Its organization reflects the structure of corporate law across all jurisdictions, while individual chapters explore the diversity of jurisdictional approaches to the common problems of corporate law. In its second edition, the book has been significantly revised and expanded.

As the book's introductory chapter, this article describes the functions and boundaries of corporate law. We first detail the economic importance of the corporate form's hallmark features: legal personality, limited liability, transferable shares, delegated management, and investor ownership. We then identify the major agency problems that attend the corporate form, and that, therefore, corporate law must address: conflicts between managers and shareholders, between controlling and minority shareholders, and between shareholders as a class and non-shareholder constituencies of the firm such as creditors and employees. In our view, corporate law serves in part to accommodate contract and property law to the corporate form and, in substantial part, to address the agency problems that are associated with this form. We next consider the role of law in structuring corporate affairs so as to achieve these goals: whether, and to what extent standard forms - as opposed, on the one hand, to private contract, and on the other, to mandatory rules - are needed, and the role of regulatory competition. Whilst the ‘core’ features of corporate law are present in all - or almost all - legal systems, different systems have made different choices regarding the form and content of many other aspects of their corporate laws. To assist in explaining these, we review a range of forces that shape the development of corporate law, including domestic share ownership patterns. These forces operate differently across countries, implying that in some cases, complementary differences in corporate laws are functional. However, other such differences may be better explained as a response to purely distributional concerns.

In addition to Chapter 1, Chapter 2 of the Anatomy of Corporate Law (2nd ed.), Agency problems, Legal Strategies, and Enforcement is also available (full text) on SSRN at http://ssrn.com/abstract=1436555.

Corporation, agency problem, corporate law, corporate regulation, corporate governance, securities law, limited liability, regulatory competition, mandatory rules, comparative corporate law, evolution of corporate law

Abstract:
Education, and particularly higher education, has an important characteristic that distinguishes it from most other goods and services: it is an "associative" good. The essential characteristic of an associative good is that, when choosing which producer to patronize, a consumer is interested not just in the quality and price of the firm's products, but also in the personal characteristics of the firm's other customers. When choosing among undergraduate colleges, for example, a student is interested not just -- or even primarily -- in the colleges' faculty, curriculum, and facilities, but also in the intellectual aptitude, previous accomplishments, sociability, athletic prowess, wealth, and family connections of the colleges' other students. The reason is obvious: these and other attributes of a student's classmates have a strong influence on the quality of the student's educational and social experience, the relationships (including marriage) that the student will have later in life, and the student's personal and professional reputation.

Markets for associative goods do not function like markets for other goods and services. This is especially true when the producing firms are all nonprofit or governmental, as is the case in the upper reaches of higher education. Most importantly, when nonprofit firms produce associative goods, there is a particularly strong tendency for customers to become stratified across firms according to their personal characteristics. Those customers who are most desirable as fellow customers will tend to cluster at one firm, the next most desirable at another, and so on down.

This essay surveys the implications of the associative character of higher education for the ownership and control structure of universities, both past and future, for the efficiency and equity of markets for higher education, for the market power of elite universities, and for collusive behavior and antitrust policy.

Abstract:
A central goal in devising a system of courts is to make judicial services easily accessible. As a consequence, justice is usually administered in a geographically decentralized fashion: trial courts are distributed across the territory in which the jurisdiction's law is applied. Corporate law, however, does not fit this pattern: courts are often located far away from the companies subject to their jurisdiction. In particular, Delaware law governs most publicly traded firms in the U.S., and is now extending its reach to encompass corporations headquartered around the globe. But Delaware courts are located only in Delaware. Consequently, there is a large and growing disparity between the geographic area where Delaware law is applied and the location of Delaware courts. This disparity is all the more striking because the quality of the Delaware judiciary is a prime reason why firms incorporate under Delaware law. This situation provokes a simple question: would it not be both desirable and feasible to have Delaware, and other jurisdictions whose law has extraterritorial reach, hold hearings and trials out of state? The creation of such extraterritorial courts might well yield significant benefits: litigation costs could be lowered, and regulatory competition between jurisdictions could be increased with regard to both substantive corporate law and judicial services.

This paper explores the issues involved in such a regime of extraterritorial courts. We consider those issues as they arise within the U.S., within the EU, and globally. We largely limit our analysis to courts whose jurisdiction is confined to corporate law. We note, however, that much of what we say applies as well to other areas of commercial law. Moreover, whatever the merits of extraterritorial courts as a practical proposal, in exploring their promise we gain important perspective on the basic relationships among substantive law, adjudication, and territoriality, and on the differences between private arbitration and public adjudication.

extraterritorial, courts, Delaware, regulatory competition, arbitration, soverignity, jurisdiction

Abstract:
The many legal forms for business organisations that first appeared in the United States during the last thirty years - the limited liability company (LLC), the limited liability partnership (LLP), the limited liability limited partnership (LLLP) and the statutory business trust - all combine the pattern of creditors' rights, or asset partitioning, that is traditional to the business organisation with the freedom of contract among investors and managers that is traditional to the partnership. To view these new entities as partnership-like is to treat the degree of freedom of contract as the essential difference between the traditional corporation and partnership forms; to view them as corporation-like is to treat the pattern of creditors' rights as the essential difference. While recent scholarship often takes the former view, the latter seems more accurate. History shows that much of the contractual inflexibility in the traditional corporation served merely to buttress its pattern of creditors' rights and that this inflexibility fell away upon the development of substitute sources of investor protection. The new forms are thus better understood as part of the continuing development of the corporate form rather than as entities more akin to the traditional partnership, which has in fact been evolving in a different direction. This article first develops this argument in terms of the trade-off between contractual freedom and the form of asset partitioning that to date has received the most scholarly attention, that is, limited liability. It then explores the evolution of the new forms from a less familiar perspective, focusing on the entity shielding component of asset partitioning.

corporations; partnerships; organizations; history; limited liability companies; legal entities; asset partitioning

Abstract:
The many legal forms for business organizations that first appeared in the U.S. during the last thirty years - the Limited Liability Company (LLC), the Limited Liability Partnership (LLP), the Limited Liability Limited Partnership (LLLP), and the statutory Business Trust - all combine the pattern of creditors' rights, or asset partitioning, that is traditional to the business corporation with the freedom of contract among investors and managers that is traditional to the partnership. To view these new entities as partnership-like is to treat the degree of freedom of contract as the essential difference between the traditional corporation and partnership forms; to view them as corporation-like is to treat the pattern of creditors' rights as the essential difference. While recent scholarship often takes the former view, the latter seems more accurate. History shows that much of the contractual inflexibility in the traditional corporation served merely to buttress its pattern of creditors' rights, and that this inflexibility fell away upon the development of substitute sources of investor protection. The new forms are thus better understood as part of a continuing development of the corporate form rather than as entities more akin to the traditional partnership, which has in fact been evolving in a different direction.

The essay first develops this argument in terms of the tradeoff between contractual freedom and the form of asset partitioning that to date has received the most scholarly attention - that is, limited liability. It then explores the evolution of the new forms from a less familiar perspective, focusing on the entity shielding component of asset partitioning.

Corporations, Partnerships, Organizations, History, Limited Liability Companies, Legal Entitites, Asset Partitioning

Abstract:
The world's nations vary widely in the quality of their judicial systems. In some jurisdictions, the courts resolve disputes quickly, fairly, and economically. In others, they are slow, inefficient, biased, incompetent, or corrupt. These differences are important not just for litigants, but for nations as a whole: effective courts are important for economic development.

A natural implication is that countries with underperforming judiciaries should reform their courts. Yet reform is both difficult and slow. Another way to deal with a dysfunctional court system is for litigants from afflicted nations to have their cases adjudicated in the courts of other nations that have better-functioning judicial systems. We explore here the promise of such cross-jurisdictional litigation, and the reforms needed to make it succeed.

The issue is timely. The increasing pace of global commerce is creating pressures for legal reforms that will dramatically improve the legal environment for litigating across borders. Moreover, advances in transportation and telecommunications are making it increasingly practical for parties to litigate in remote courts. Just as residents of New York City now commonly obtain assistance with utility bills and computer software telephonically from service personnel in Bangalore, it should become possible for merchants in Bangalore to have their disputes decided in New York courts via the internet.

Judicial services, arbitration, courts, competition, choice of forum, international litigation, choice of law, corporations, regulatory competition, development

Abstract:
This article is the second chapter of the second edition of "The Anatomy of Corporate Law: A Comparative and Functional Approach," by Reinier Kraakman, John Armour, Paul Davies, Luca Enriques, Henry Hansmann, Gerard Hertig, Klaus Hopt, Hideki Kanda and Edward Rock (Oxford University Press 2009). The book as a whole provides a functional analysis of corporate (or company) law in Europe, the U.S., and Japan. Its organization reflects the structure of corporate law across all jurisdictions, while individual chapters explore the diversity of jurisdictional approaches to the common problems of corporate law. In its second edition, the book has been significantly revised and expanded.

"Agency Problems and Legal Strategies" establishes the analytical framework for the book as a whole. After further elaborating the agency problems that motivate corporate law, this chapter identifies five legal strategies that the law employs to address these problems. Describing these strategies allows us to more accurately map legal similarities and differences across jurisdictions. Some legal strategies are "regulatory" insofar as they directly constrain the actions of corporate actors: for example, a standard of behavior such as a director's duty of loyalty and care. Other legal strategies are "governance-based" insofar as they channel the distribution of power and payoffs within companies to reduce opportunism. For example, the law may accord direct decision rights to a vulnerable corporate constituency, as when it requires shareholder approval of mergers. Alternatively, the law may assign appointment rights over top managers to a vulnerable constituency, as when it accords shareholders - or in some jurisdictions, employees - the power to select corporate directors. We then consider the relationship between different enforcement mechanisms - public agencies, private actors, and gatekeeper control - and the basic legal strategies outlined. We conclude that regulatory strategies require more extensive enforcement mechanisms - in the form of courts and procedural rules - to secure compliance than do governance strategies. However, governance strategies, for efficacy, require shareholders to be relatively concentrated so as to be able to exercise their decisional rights effectively.

In addition to Chapter 2, Chapter 1, "What is Corporate Law?," is available in full text on the SSRN at http://ssrn.com/abstract=1436551

Agency, agency cost, agency problem, appointment rights, decision rights, control rights, regulation, corporate governance, equal treatment, trustee, mandatory disclosure, enforcement, private enforcement, public enforcement, gatekeeper control

Abstract:
Over the past 20 years, demand for acute care hospital services has declined more rapidly than has hospital capacity. This paper investigates the extent to which the preponderance of the nonprofit form in this industry might account for this phenomenon. We test whether rates of exit from the hospital industry differ significantly across the different forms of ownership, and especially whether secular nonprofit hospitals reduce capacity more slowly than do other types of hospitals. We estimate the effect of population changes (a proxy for changes in demand) at the zip-code level between 1985 and 1994 on changes in the capacity of for-profit, secular nonprofit, religious nonprofit, and public hospitals over the same period, holding constant metropolitan statistical area (MSA) fixed effects and other 1985 baseline characteristics of residential zip codes. We find that for-profit hospitals are the most responsive to reductions in demand, followed in turn by public and religiously affiliated nonprofit hospitals, while secular nonprofits are distinctly the least responsive of the four ownership types.

Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Abstract:
Over the past 20 years, demand for acute care hospital services has declined more rapidly than has hospital capacity. This paper investigates the extent to which the preponderance of the nonprofit form in this industry might account for this phenomenon. We test whether rates of exit from the hospital industry differ significantly across the different forms of ownership, and especially whether secular nonprofit hospitals reduce capacity more slowly than do other types of hospitals. We estimate the effect of population changes (a proxy for changes in demand) at the zip-code level between 1985 and 1994 on changes in the capacity of for-profit, secular nonprofit, religious nonprofit, and public hospitals over the same period, holding constant metropolitan statistical area (MSA) fixed effects and other 1985 baseline characteristics of residential zip codes. We find that for-profit hospitals are the most responsive to reductions in demand, followed in turn by public and religiously affiliated nonprofit hospitals, while secular nonprofits are distinctly the least responsive of the four ownership types.

nonprofit, hospitals, exit, capacity, capital, ownership, supply response

Abstract:
The world's nations vary widely in the quality of their judicial systems. In some jurisdictions, the courts resolve commercial disputes quickly, fairly, and economically. In others, they are slow, inefficient, incompetent, biased, or corrupt. These differences are important not just for litigants, but for nations as a whole: effective courts are important for economic development. A natural implication is that countries with underperforming judiciaries should reform their courts. Yet reform is both difficult and slow. Another way to deal with a dysfunctional court system is for litigants from afflicted nations to have their commercial disputes adjudicated in the courts of other nations that have better-functioning judicial systems. We explore here the promise of such extraterritorial litigation and conclude that it is strong, particularly in light of a communications revolution that permits litigation in a remote court without requiring travel by parties, witnesses, or lawyers..

Private arbitration is another alternative to weak local courts, and its role will surely continue to expand. But public courts have important advantages over private arbitration in resolving commercial disputes. Consequently, broader international access to well-functioning public courts holds unique promise.

The volume of extraterritorial litigation is presently small. A set of basic legal and practical reforms could, however, change that situation dramatically. To motivate those reforms, it is essential that jurisdictions with strong courts have an incentive to attract foreign litigants. The best way to achieve this is through higher court fees for foreign litigants who lack substantial ties to the forum state. This may require important adjustments in legal culture. But only by abandoning formal equality in court fees is it likely that real global equality in access to judicial services can be accomplished.

adjudication, arbitration, courts, competition, choice of forum, international litigation, choice of law, contracts, rule of law, regulatory competition, development

Abstract:
Legislation creating or reinforcing resale royalties for visual artists retains substantial political popularity, particularly in the European Union - despite the often skeptical attitude toward those rights in the economics literature. In this essay, we probe more deeply the affirmative arguments that can be made for a resale royalty right, in either a mandatory or a discretionary form. We also compare the rationale for visual artists' resale royalties with the potential rationales for the now-well-established systems of royalty rights for authors and composers. This comparison has particular interest both because some of the principal arguments made against visual artists' resale royalties also apply to authors' royalties, and because the economic rationale for compensating authors with royalties has itself not been well explored. We also discuss briefly the related subject of display rights for visual artists. We conclude with some general implications for policy.

droit de suite, royalties, artists, authors, commissions

Abstract:
Legislation creating or reinforcing resale royalties for visual artists retains substantial political popularity, particularly in the European Union - despite the often skeptical attitude toward those rights in the economics literature. In this essay, we probe more deeply the affirmative arguments that can be made for a resale royalty right, in either a mandatory or a discretionary form. We also compare the rationale for visual artists' resale royalties with the potential rationales for the now-well-established systems of royalty rights for authors and composers. This comparison has particular interest both because some of the principal arguments made against visual artists' resale royalties also apply to authors' royalties, and because the economic rationale for compensating authors with royalties has itself not been well explored. We also discuss briefly the related subject of display rights for visual artists. We conclude with some general implications for policy.

droit de suite, royalties, artists, authors, commissions

Abstract:
The quality of national judicial systems varies widely from country to country. In some jurisdictions, the courts resolve commercial disputes quickly, fairly, and economically, while in others, they are slow, inefficient, incompetent, biased, or corrupt. These differences affect not only litigants, but nations as a whole: effective courts are important for economic development. A natural implication is that countries with underperforming judiciaries should reform their courts. Unfortunately, judicial reform is both difficult and slow. Another way to deal with a dysfunctional court system is for litigants from afflicted nations to have their domestic commercial disputes adjudicated in better-functioning foreign courts. In this Article, we explore the potential advantages and limitations of such extraterritorial litigation and conclude that its promise is strong, particularly in light of a revolution in communications technology that permits litigation in a remote court without travel by parties, witnesses, or lawyers.

Private arbitration is another alternative to ineffective local courts, and its role in resolving commercial disputes will surely continue to expand. Public courts, however, have important advantages over private arbitration in resolving commercial disputes. Consequently, broader international access to well-functioning public courts holds unique promise.

Presently, the volume of extraterritorial litigation is small. A set of basic legal and practical reforms could, however, change that situation dramatically. To motivate those reforms, it is essential that jurisdictions with strong courts have an incentive to attract foreign litigants. The best way to achieve this is through higher court fees for foreign litigants who lack substantial ties to the forum state. This may require important adjustments in legal culture.

adjudication, arbitration, courts, competition, choice of forum, international litigation, choice of law, contracts, rule of law, regulatory competition, development

Abstract:
This Article analyzes the functions served by the law of trusts and asks, first, whether the basic tools of contract and agency law could fulfill the same functions and, second, whether trust law provides benefits that are not provided by the law of corporations. The analysis is motivated in part by the increasing interest in the trust -- a familiar feature of common-law jurisdictions -- in a number of civil law countries, and in part by the important role that trusts, such as pension funds and mutual funds, have come to play in capital markets.

The article concludes that the important contribution of trust law lies not in its well-recognized role of ordering, via default rules of contract, the relationships among the principal parties to the trust. Rather, the principal benefit of trust law lies in its ordering of relationships between those parties and third parties with whom they deal, relationships that cannot easily be rearranged by contract. Most conspicuously in this respect, trust law allows the parties to the trust to partition off a discrete set of assets for separate treatment in relationships formed with creditors. The essential role of the trust, therefore, is to perform a property law-like, rather than a contract law-like, function.

The article also notes the increasing convergence of trust law and corporate law, and asks whether the roles performed by these two legal forms could just as well be served by a single form.

Abstract:
In modern economies, large-scale enterprise exhibits a variety of ownership forms. Most common and familiar is ownership by those persons -- individuals or organizations -- that supply the firm with financial capital. Other forms of ownership are important as well, however, including employee ownership (as in partnerships of professionals), ownership by suppliers of other factors of production (as in farm marketing cooperatives), ownership by customers (as in consumer-owned utilities, mutual insurance and banking companies, condominium housing, and business-owned wholesale, supply, and service cooperatives), nonprofit firms, and governmental enterprise.
This essay briefly explores three questions raised by such a diverse pattern of ownership: First, to what extent do underlying economic factors account for variation in ownership forms across industries, across societies, and across time? Second, what is the influence of law upon these patterns? Third, to what extent has law, and particularly organizational law, adapted to facilitate the formation and management of the forms of ownership that have evolved?

Abstract:
Once widely considered just a theoretical curiosity or an ideological aspiration, employee ownership of enterprise has attracted considerable interest in recent years as a practical matter of organization. In the West, this interest derives in considerable part from the decline of unionism and the resulting search for other means of assuring efficiency and equity in labor contracting, while in the East, interest in employee ownership has been stimulated by the rapid market-oriented ownership structures that stop short of a direct leap into full finance capitalism.

This essay explores the relative efficiency advantages and disadvantages of employee ownership with respect to other forms of ownership--in particular, investor ownership--and seeks to explain why employee ownership has become widespread in some industries, such as the service professions, while it remains rare in many others. The general conclusion offered is that employee ownership appears relatively efficient in a broad range of circumstances so long as control of the firm can be placed in the hands of a class of employees who have highly homogeneous interests. Where, however, this condition cannot be met--as is commonly the case--other forms of ownership typically have the advantage.