The Production of Corporate Law

Abstract:     
This paper challenges the conventional wisdom that the competition for corporate chartering business is between states, and replaces it with an interest group view of corporate law production. Changes in corporate law in the U.S. are claimed to be driven primarily by lawyers and corporate managers. Managers are viewed as specializing in changes that can be viewed as creating rents for management, while lawyers sponsor more general changes. While Delaware lawyers are dominant producers, this paper demonstrates that lawyers in other states compete as well. The competition is shown to result in relative uniformity of American corporate laws, qualified principally by the dynamics of diffusion of innovations. Changes sponsored by lawyers, who face serious collective action problems, proceed at a relatively slow pace, while changes sponsored by managers, who appear to face lower costs, proceed more rapidly. The Model Business Corporation Act is a cost-reducing device for lawyers that increases the rate of diffusion. While the evidence of the speed of change for anti-takeover statutes suggests a "race to the bottom," in corporate law production, the evidence of more general changes suggests a "race to the top." Possible inefficiencies from rent-seeking legislation appear to be constrained by competitive forces.

Accepted Paper Series