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Disintegrating the Regulation of the Business Corporation as a Nexus of Contracts: Regulatory Competition vs. Unification of Law

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Abstract

We apply the paradigm of the firm as a nexus of contracts to the debate on regulatory competition vs. unification of law as an alternative way of regulating the business corporation. This approach views the business corporation as a set of coordinated contracts among different parties. Agency problems and related agency costs are the result of this interaction. The economic analysis of corporate law, securities regulation and bankruptcy law identifies law as a means to minimise such agency costs. In this paper, we develop a model where companies are heterogeneous in their preferences about the legal regulation of contractual relationships. We then compare a regime of regulatory competition with one of single supply of regulation and we analyse their relative costs and benefits.

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References

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  38. This is, as is well known, a typical European regulatory strategy to implement the common market.

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  50. We do not take into consideration bankruptcy proceedings that are transnational for the USA, i. e., that involve the USA and one or more foreign countries. These proceedings are regulated under the new Chapter 15 of the Bankruptcy Code. On the new regime, see T. Rüfner, ‘Neues internationales Insolvenzrecht in den USA’ [New International Insolvency Law in the USA], 26 Zeitschrift für Wirtschaftsrecht (2005) p. 1865.

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  53. According to the conflict of law rules of several Member States, following both the real seat theory and the incorporation theory, the place (i. e., the Member State) where the company’s registered office is should coincide with the place of incorporation (i. e., the Member State of incorporation).

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  59. See Eidenmüller, supra n. 55, proposing a combination of corporate law and bankruptcy law both provided by the same Member State and enforced by its unique forum (same lex fori concursus and lex societatis), and Franken, supra n. 46, who, arguing from a supply side perspective (i. e., the incentives to provide efficient bankruptcy law) proposes possible divergence of applicable bankruptcy law and company law while retaining the principle of the lex fori for both.

  60. From a strictly technical point of view, the model we are dealing with is not a principal-agent one. Nevertheless, the profit function that we use for the corporation can be seen as a reduced form of the traditional framework. Moreover, the main focus of our analysis is not on relations within the firm but rather on the effect of a regulatory competition regime on the corporation as a whole.

  61. In fact, we could imagine a more complex situation where jurisdictional competence and applicable law are provided by two different jurisdictions, which means that, e. g., a court of jurisdiction A will apply the securities regulation of jurisdiction B. Scholars who are familiar with issues of international private law know that this is possible. Other scholars have enriched the regime, proposing for the EU that an arbitration body and not a national court apply the law of the Member State of incorporation. See C. Kirchner, R.W. Painter and W.A. Kaal, ‘Regulatory Competition in EU Corporate Law after Inspire Art: Unbundling Delaware’s Product for Europe’, 2 European Corporate and Financial Law Review (2005) p. 159.

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  62. As in the Jensen and Meckling model, we assume that capital markets are efficient and all actors are characterised by rational expectations. We stress that the law and finance literature basically confirms that the price of securities is evaluated and discounted ex ante among jurisdictions in a comparative way.

  63. With the term quality we refer to the effort that the regulator may apply to refine provisions and/or to establish a higher level of enforcement.

  64. The importance of heterogeneity of companies in relation to their needs is also discussed and assumed by Hadfield and Talley, supra n. 8.

  65. See the Appendix for precise statements of the assumptions on which each proposition is based.

  66. In section 4.2, we will remove this assumption and discuss what happens in the case of an unbundled provision of laws.

  67. See Appendix A for detailed proof.

  68. Formal assumptions and proofs can be found in Appendix B.

  69. We stress that the single jurisdiction case is just a benchmark that we will use later to evaluate the welfare properties of the regulatory competition regime. Discussing the multiple equilibria issue would make the analysis less straightforward without adding any interesting insight.

  70. This assumption is common to many models of product differentiation. See, for instance, the well-known Linear City model in A. Mas-Colell, M.D. Whinston and R. Green, Microeconomic Theory (Oxford, Oxford University Press 1995). Nevertheless, we are aware that if the distribution is not uniform, some of the results shown in the following subsections may be subject to slight changes.

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Authors and Affiliations

  1. School of Economics and Management, Free University of Bolzano, Italy

    Stefano Lombardo (ECGI Research Associate, CRELE Research Associate)

  2. University of Bologna and University of Siena, Italy

    Piero Pasotti

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  1. Stefano Lombardo
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  2. Piero Pasotti
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Correspondence to Stefano Lombardo.

Additional information

We wish to thank Rainer Kulms, Francisco Marcos and Ernesto Savaglio for their helpful comments. Furthermore, we thank Luca Enriques, Luigi Alberto Franzoni and Emanuela Carbonara for their comments on a very preliminary version of this paper. We also thank all the participants in the EMLE Midterm Meeting 2005/2006 at the University of Hamburg, in the EALE Conference 2006 and in the SIDE Conference 2006. Finally, we thank the anonymous referee. The usual disclaimers apply.

Although this article was elaborated jointly by the authors, for the purpose of academic evaluation it has to be stressed that, according to the respective scientific competences, sections 2 and 3 were written by Stefano Lombardo while section 4 as well as the mathematical appendix were drawn up by Piero Pasotti.

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Lombardo, S., Pasotti, P. Disintegrating the Regulation of the Business Corporation as a Nexus of Contracts: Regulatory Competition vs. Unification of Law. Eur Bus Org Law Rev 10, 35–72 (2009). https://doi.org/10.1017/S1566752909000354

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