Using Behavioral Economics to Show the Power and Efficiency of Corporate Law as Regulatory Tool
73 Pages Posted: 29 Jul 2001
Date Written: July 8, 2001
Prepared for the Daniel J. Dykstra Corporate Governance Symposium at University of California, Davis, in February 2001, this article argues that changes in corporate governance in the United States - specifically the relaxation of the profit maximization norm, the broadening of management's fiduciary duties to include workers, and the inclusion of worker representatives on boards of directors - are likely to be efficient means of reaching certain preferred policy outcomes, such as an increase in the wages of working people and a decrease in income inequality. Instead of being seen as "private law," corporate law should be regarded as a regulatory tool and judged on that basis. Thus, rather than focusing on whether changes in corporate governance would be beneficial or harmful to the firm, the discussion should take account of the likelihood that certain changes in corporate governance, even if costly to shareholders, might nevertheless be on net socially beneficial. Moreover, because of the nature of the changes proposed, there is reason to believe that the suggested adjustments in corporate governance are not only powerful in achieving certain policy goals but also relatively efficient in achieving them. This paper will use insights from behavioral economics to advance these arguments.
Keywords: corporate governance, behavioral economics, codetermination, employee relations, wage rates, income inequality
JEL Classification: J31, J38, K22, K23, K31, L20, M14
Suggested Citation: Suggested Citation