The Market for Corporate Law
Journal of Institutional and Theoretical Economics, Vol. 162, pp. 134-172, 2006
44 Pages Posted: 28 Jun 2001 Last revised: 17 Aug 2009
This paper develops a model of the competition among states in providing corporate law rules. The analysis provides a full characterization of the equilibrium in this market. Competition among states is shown to produce optimal rules with respect to issues that do not have a substantial effect on managers' private benefits but not with respect to issues (such as takeover regulation) that substantially affect these private benefits. We analyze why a dominant state such as Delaware can emerge, the prices that the dominant state will set and the profits it will make. The results of the model are consistent with, and can explain, existing empirical evidence. Finally, the analysis highlights the importance of the rules governing reincorporation and the potential benefits of giving shareholders the power to make reincorporation decisions.
Keywords: corporate law, managers, shareholders, regulatory competition, Delaware, private benefits of control, network externalities
JEL Classification: G30, G38, H70, K22
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