Contractual Tradeoffs and Smes Choice of Organizational Form, a View from U.S. And French History, 1830-2000

62 Pages Posted: 21 Aug 2006 Last revised: 15 Jul 2022

See all articles by Naomi R. Lamoreaux

Naomi R. Lamoreaux

National Bureau of Economic Research (NBER); Yale University

Jean-Laurent Rosenthal

University of California, Los Angeles (UCLA) - Department of Economics

Date Written: August 2006

Abstract

Today the vast majority of multi-owner firms in the United States are corporations, but that was not the case in the past. Before the advent of the income tax, tort litigation, and significant federal regulation, entrepreneurs more often than not chose to organize as partnerships, a form that economists consider seriously flawed. Why would they make such a terrible mistake? We begin by noting that corporations created new types of contracting problems for businesses at the same time as they solved problems afflicting partnerships. We then model the tradeoffs involved in the choice of corporations versus partnerships and confirm that the model's assumptions are consistent with U.S. legal rules up through the 1940s. The model implies that partnerships and corporations are complementary organizational forms, and we show that data from the U.S. Census of Manufactures strongly supports that implication. We also verify that the model's assumptions hold for the broader set of organizational choices available under the French Code de Commerce and use data on multi-owner firms registered in Paris in the 1830s and 1840s to demonstrate the complementary character of the basic forms. Despite much literature emphasizing the fundamentally different environments for business associated with the French and U.S. legal regimes, the basic calculus underpinning the choice of organizational form was the same in both countries.

Suggested Citation

Lamoreaux, Naomi R. and Lamoreaux, Naomi R. and Rosenthal, Jean-Laurent, Contractual Tradeoffs and Smes Choice of Organizational Form, a View from U.S. And French History, 1830-2000 (August 2006). NBER Working Paper No. w12455, Available at SSRN: https://ssrn.com/abstract=924741

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Jean-Laurent Rosenthal

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