Abstract
For the corporate business model to be successful, it is important to align the interests of those who control and finance the firm. Corporate law has here an important task to fulfill. It offers a legal framework that can facilitate parties to conclude mutually preferable agreements at low transaction costs. The purpose of this paper is to show how to design corporate law to fulfill this task and apply this knowledge to a Swedish case. A two-dimension model that simultaneously considers both the regulation intensity and the level of default of corporate law is presented. The earlier literature treats these dimensions separately. By adding a transaction cost perspective to our model, we assess different regulatory techniques and examine how the Swedish legislation can be amended to help corporations by offering a standard contract that lowers the transaction costs of contracting. This can be achieved if default rules or standards of opt-out character are combined with other regulatory techniques with lower transaction costs such as opt-in alternatives and menus. We also show how our model can be used in other studies as a tool to analyze the design of legal rules.
Highlights
Corporate law matters for economic efficiency and growth (Cooter and Schäfer 2012)
The model serves as an analytic tool for policy changes as it eases the understanding of how transaction costs for individual firms affect the effectiveness of the different techniques and how regulatory techniques can be used to match the needs of different types of corporations, e.g., public corporations, corporation with and without controlling shareholders, closely held businesses and family firms
This model functions as an analytic tool that helps us to understand and evaluate different regulatory techniques based on their level of regulation intensity and the level of default
Summary
Corporate law matters for economic efficiency and growth (Cooter and Schäfer 2012). the design of corporate law is important. The legislator should offer a legal framework that aligns the interests of those who control and finance the firm. We accept the challenge and offer an economic analysis of the design of Swedish corporate law For this purpose, we present a two-dimension model that makes it possible to analyze and characterize corporate law with respect to the level of regulation intensity and the level of default. As our model works as an analytic tool that can guide lawmakers in the choice between regulatory techniques such as the choice between rules or standards and between mandatory or default regulation, we see that it potentially has universal character and can be applied to other corporate law issues as well as other areas of law. We present our two-dimension model discussing the default and regulation intensity aspects of corporate law and how economic efficiency/growth and transaction costs are affected hereby.
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