The Equilibrium Content of Corporate Federalism

78 Pages Posted: 10 Dec 2004 Last revised: 22 Jan 2019

See all articles by William W. Bratton

William W. Bratton

University of Pennsylvania Carey Law School; University of Miami School of Law; European Corporate Governance Institute (ECGI)

Joseph A. McCahery

Tilburg University - School of Law; European Banking Center (EBC); Tilburg Law and Economics Center (TILEC); European Corporate Governance Institute (ECGI)

Date Written: August 11, 2010


This Article offers a positive political economy of corporate federalism. It draws on the history of corporate law and basic concepts of evolutionary game theory to locate the content of corporate federalism in two stable equilibriums. The first equilibrium prevails in the charter market, following from Delaware's successful pursuit of an evolutionarily stable strategy to maximize rents from the sale of charters. The strategy, first followed by New Jersey, caused a radical change in corporate law in the late nineteenth century. Since then, stability has ruled. Corporate law's basic, enabling outline changed little during the twentieth century. Operative incentives, market structure, and regulatory results have been more constant than dynamic, even as Delaware often has adjusted its strategy as it has adapted to events. The second equilibrium is more political than economic and prevails among the makers of national corporate law - Congress, the Securities and Exchange Commission, the stock exchanges, and the federal courts. These actors react to events in a more volatile manner. But even here equilibrium has prevailed since 1934. In theory, under the prevailing norm, national regulation covers the securities markets and mandates transparency respecting firms with publicly traded securities while internal corporate affairs are left to the states. In practice, federal lawmakers sometimes disregard the norm, entering into internal affairs as the national system grows episodically. This national intervention into internal affairs is inevitable because Delaware follows an evolutionarily stable strategy that constrains its ability to respond to shocks that create national political demands. But national regulators follow a norm of cooperation even as they make these incursions. Federal regulators never structure interventions so as to disrupt the state equilibrium. They leave Delaware in place, along with its stable strategy and its rents. The Article asserts that this is the core of the federalism, a view that contrasts with a prevailing subject matter-based conception. From this perspective, the threat of disabling federal intervention has sunk into the deep constitutional structure, leaving Delaware safe in the present context.

Keywords: corporate law, corporate federalism, Delaware, shareholder value, fiduciary law

JEL Classification: H77, K22

Suggested Citation

Bratton, William Wilson and McCahery, Joseph A., The Equilibrium Content of Corporate Federalism (August 11, 2010). Wake Forest Law Review, Vol. 41, No. 3, p. 619, 2006, ECGI - Law Working Paper No. 23/2004; Georgetown Law and Econ. Research Paper No. 606481, Available at SSRN: or

William Wilson Bratton (Contact Author)

University of Pennsylvania Carey Law School ( email )

3501 Sansom Street
Philadelphia, PA 19104
United States

University of Miami School of Law ( email )

P.O. Box 248087
Coral Gables, FL 33146
United States

European Corporate Governance Institute (ECGI) ( email )



Joseph A. McCahery

Tilburg University - School of Law; European Banking Center (EBC) ( email )

Warandelaan 2
Tilburg, 5000 LE
+31-(0)13-466-2306 (Phone)
+31-(0)13-466-2323 (Fax)

Tilburg Law and Economics Center (TILEC)

Warandelaan 2
Tilburg, 5000 LE

European Corporate Governance Institute (ECGI)

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels


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