Competition, Inefficiencies, and Dominance in Corporate Law: Comment

Abstract

The paper by Oren Bar-Gill, Michal Barzuza, and Lucian Bebchuk (Bar-Gill, Barzuza, and Bebchuk [2006]) comes last in a line of theoretical attempts at explaining whether a market for corporate law exists in the United States, and if so, how that market works. This debate has become one of the classical puzzles among corporate-law scholars. It has been discussed for some time now, and thus a number of conflicting views and accounts at the present time are engaged in a tournament to win the award for the most convincing theory of them all. Essentially, there are three major positions. The first and the orthodox one among economically minded scholars proposes the idea that American corporate law is the product of healthy competition among the states, a process that, almost inexorably, is leading to efficient corporate-law rules (Romano [1985]; Easterbrook and Fischel [1982]). The thesis is very simple. The states try to attract clients (companies deciding their state of incorporation) by offering a better (more desirable to the companies) set of rules to organize the structure and running of the corporation. Competitive pressures push the states to adopt rules that benefit shareholders, and, as in other markets, product quality is in the end optimal. A very suggestive thesis, and still the dominant view. It leaves, however, an uneasy aftertaste, maybe as a result of its overarching reach, extending over the entire corporate-law area. The opposite view is that the perfect world of regulatory competition is far from the truth. It is a myth: the market for corporate charters and corporate law is anything but competitive (Kahan and Kamar [2002]; Bebchuk, Cohen, and Ferrell [2002]; ROE [2003]). Moreover, one could even think that there is no market at all, since there is but one supplier in this so-called market: Delaware. Delaware has a virtual monopoly on incorporation. And a monopoly, not to be forgotten, in the shadow of the federal government, which has gained increasing regulatory powers over corporate law, and can intervene if things go wrong or tend to unwelcome directions. In this gloomy (for healthy competition, we mean) scenario, it is easy to