The Contractarian Theory of Corporate Law: A Generation Later

Abstract:     
This article analyzes the extent to which contractarian analysis of corporate law has stood up to a generation of scholarship in law and economics - particularly empirical scholarship. It concludes that while the contractarian theory remains a useful starting point, more recent research demonstrates that as a description of reality or a basis for policy prescription, the theory falls short. Two phenomena reflect shortcomings in the contractarian theory. First, corporate contracts exhibit a high degree of uniformity - in Delaware incorporation and in the adoption of default rules. Second, customization and innovation in corporate governance have occurred in noncontractual form - that is, without legally binding commitments to maintain them. The positive implication is that there are apparently impediments to the creation of legally binding governance commitments. Those impediments may undermine the contractarian link between contract and social optimality. The normative implication is that the minimalist view of corporate law - that everything can be left to customized contracting - is questionable. A menu approach to the design of corporate law may be more effective than either the default rule structure that the contractarian theory prescribes or an approach of mandatory regulation.

Number of Pages in PDF File: 20

Keywords: corporate law, corporate governance, contract, contractarian

JEL Classification: G30, G34, K22, K00

Accepted Paper Series