Working Paper: CEPR ID: DP3553
Authors: Oren Bar-Gill; Michal Barzuza; Lucian Arye Bebchuk
Abstract: 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 analyse why a dominant state such as Delaware can emerge, the prices that the dominant state will set and the profits it will make. We also analyse the roles played by legal infrastructure, network externalities, and the rules governing incorporations. The results of the model are consistent with, and can explain, existing empirical evidence; they also indicate that the performance of state competition cannot be evaluated on the basis of how incorporation in Delaware in the prevailing market equilibrium affects shareholder wealth.
Keywords: corporate law; Delaware; network externalities; private benefits of control; regulatory competition; shareholders
JEL Codes: G30; G38; H70; K22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| state competition (L49) | optimal rules (C61) |
| state competition (L49) | emergence of a dominant state (F55) |
| state competition (for non-redistributive issues) (H73) | adoption of shareholder-friendly rules (G34) |
| state competition (for redistributive issues) (H73) | adoption of pro-manager rules (J54) |
| Delaware's dominance (N91) | strategic choices regarding legal infrastructure and pricing (D49) |
| strategic choices regarding legal infrastructure and pricing (D49) | attract incorporations (G34) |
| Delaware's pro-manager rules (G34) | worse outcomes for shareholders (G34) |
| state competition (L49) | strategic decisions that shape competitive landscape (L21) |
| incorporation in Delaware (K22) | shareholder wealth (G34) |