The Production of Corporate Law
William J. Carney
Emory University School of Law
The production of corporate law has been seen as a competition among the states. This paper takes an interest group view of the production of law, and argues that changes in corporate laws in the United States are driven primarily by lawyers and corporate managers. The benefits to lawyers from modern corporate laws include retention of corporate clients as local corporations, thus excluding the competition of out-of-state lawyers with expertise in Delaware law. But because the production of law is a public good, lawyers find initiating legal change costly, and innovations proceed slowly. Managers, on the other hand, are not generally experts on corporate law, but focus on particular issues that affect them directly, such as antitakeover laws and laws affecting their personal liability. The paper examines the degree of uniformity resulting from this competition, and finds a high degree of correspondence with the norms set in the Model Business Corporation Act. Deviations from this uniformity are explained in large part by innovations, many of which originate in the Model Act. The paper then examines how the collective action problems of the sponsoring interest groups influence the diffusion of innovations in corporate law. Innovations sponsored by lawyers have relatively slow rates of adoption, reflecting their collective action problems. When these costs are reduced through introduction of changes in the Model Act, the rate of diffusion increases. Managers appear to suffer from fewer collective action problems, and have a more intense interest in certain subjects because of the more direct benefits they obtain, and management-sponsored innovations are adopted much more rapidly. Possible inefficiencies from rent-seeking by interest groups appear to be constrained by competitive forces, suggesting that alternative solutions, such as federalizing corporate law, would not solve the rent-seeking problem as well, and would sacrifice the innovations obtained through the present competitive system.
Number of Pages in PDF File: 62
JEL Classification: K22
Date posted: November 1, 1997