Choice of Law: An Empirical Analysis

Abstract

I propose a new measure to study the law and economics of choice of law: “relative use of law.” Relative use of law measures the extent to which a state’s laws are disproportionally over- or underutilized in contract. It is constructed by normalizing the distribution of choice of law clauses by the extent of contracting activity within each jurisdiction. Using this measure, I study choice of law by analyzing the nearly 1,000,000 contracts that have been disclosed to the Securities and Exchange Commission between 1996-2012. These are all contracts that companies registered with the SEC deemed “material.” I find that (1) only Delaware and New York are relatively overutilized and (2) firms’ choice of law and relative use of law are converging toward Delaware, New York, and Nevada. I offer hypotheses for this convergence that are based on (1) lock-in effects of the choice of state of incorporation and (2) positive network effects of using the same law. I present suggestive evidence that lock-in effects explain convergence toward Delaware and Nevada, while network effects explain convergence toward New York.