In the US it is principally the states that are in charge of regulating the internal affairs of corporations. States allow firms to relocate in other states. Hence, it is argued that states are engaging in a process of competing for corporate charters.
In the EU this basic setting is today quite similar: the EU Member States have separately created their own corporate law systems for decades. Though only since the European Court of Justice (ECJ) ruled in a series of famous decisions from Centros to Inspire Art that Member States have to recognize firms who are incorporated under other Member States’ corporate law, the possibility for regulatory competition in corporate is opened in the EU as well.
Comparing the situations in Europe and America from a law and economics perspective, the guiding hypothesis of this thesis is that while regulatory competition in corporate law can lead to efficient results, several problems have to be taken into account. Inefficiencies in American and European regulatory competition in corporate law are mainly due to these problems. A possible normative solution to such inefficiencies is assessed.
Other findings of this thesis involves the following aspects:
Firstly, while regulatory competition in corporate law in the U.S. might have been economically efficient in the past, it now can be identified several factors that lead to suboptimal outcomes which can be explained positively by applying existing theories on the issue as complementary ones.
Secondly, the European legal and economic situation resembles important factors of the American one while there are some major differences that will probably lead to different outcomes to those in the U.S. – though these are suboptimal as well.
Thirdly, a normative conclusion is drawn from these comparative observations. It can be efficient to restructure the framework in which regulatory competition in corporate law takes place in both, the U.S. and the EU. It is proposed a form of procedural harmonization and a simplification of conflict of laws that will allow states to compete for separate modules of legal sectors in corporate law. Thus innovation and learning processes in corporate regulations will be easier comparable and a sustainable race to the top may begin.
Table of Contents
A. Introduction
B. Literature Overview
1. Race to the Bottom
2. Race to the Top
3. Race to somewhere in between
4. No Race at all
5. Race with the federal legislator
6. The European Debate
7. Summary and Empirical Evidence
a. The American Case
b. The European Case
C. Theoretical Foundations of Regulatory Competition
1. Jurisdictions as Monopolies or Competitors
2. The Market for Regulations
3. Interjurisdictional Competition
4. Forms of Regulatory Competition
5. The Object of Corporate Law: the Firm
a. Necessity of Corporate Law
b. Agency Problems in Corporate Law
D. Functioning of Regulatory Competition in Corporate Law
1. Conditions of Regulatory Competition
a. Sufficient Number of Regulators
b. Mobility of Citizens or Product Factors
2. Advantages of Regulatory Competition
a. Legitimacy
b. Limitation of Power
c. Less Rent-Seeking Activities
d. Satisfaction of Heterogeneous Preferences
e. Learning, Innovation and flexibility
f. Comparative Regulatory Advantages
g. Faster Adjustment to Beneficial Ownership Patterns
3. Problems of Regulatory Competition
a. Interstate and Network Externalities
b. Path Dependencies
c. Lacking Incentives for States
d. Information Problems
aa. Uncertainty of Conflict of Laws Rules
bb. Bounded Rationality
e. Conclusive Summary
4. Possible Solution: “Modulization” and Conflict of Laws facilitation
E. Conclusion
Objectives and Research Themes
This paper examines the dynamics of regulatory competition in corporate law within the European Union compared to the United States. It explores whether current frameworks foster efficiency, identifies existing market barriers such as path dependencies and information asymmetries, and proposes a normative approach to reform.
- Comparative legal and economic analysis of corporate law "markets" in the EU and US.
- Application of New Institutional Economics to identify market failures and incentive structures.
- Assessment of the "race to the bottom" versus "race to the top" debate.
- Examination of the role of path dependency and institutional incompatibilities.
- Development of a procedural harmonization framework, specifically "modulization" of corporate law sectors.
Extract from the Book
1. Jurisdictions as Monopolies or Competitors
According to the theory of economic policy, jurisdictions (e.g. states) can be understood in two different ways:
The first - more traditional - view begins with the insight that human beings in ‘the state of nature’ are facing an inefficient dilemma situation. To overcome this situation they arrange a collective constitutional treaty that creates a jurisdiction with a ‘monopoly of power’. This monopoly then has to be contained to protect the citizens from an abuse of the monopoly power. This can be achieved through a political process of elections and referendums and through constitutional rules that restrict the jurisdictions’ competencies. How such a system under different settings works, its actors behave and what allocative and distributional effect it creates is the analytical object of public choice theory. Emphasizing the characteristic of a monopoly, the main questions of this approach relate to the constitutional treaty and the political process. Citizens can influence the political decisions including legal rules within one jurisdiction only with lobbying and their ‘voice’.
The second view focuses on the characteristic of a jurisdiction as a competitor to other jurisdictions. Jurisdictions can enact different settings of rules. Citizens can choose their preferred jurisdiction depending on its rules when deciding where they want to live, work and invest. This will lead to a competition between jurisdictions for the mobile factors of the economy. Thus citizens can influence legal rules of many jurisdictions with their ‘exit- and entry-decisions’.
Summary of Chapters
A. Introduction: The introduction outlines the legal landscape following ECJ rulings on corporate charter recognition and defines the paper's focus on comparing US and EU regulatory competition.
B. Literature Overview: This section summarizes academic discourse on regulatory competition, covering "race to the bottom" and "race to the top" theories, as well as more recent perspectives on vertical and federal-state dynamics.
C. Theoretical Foundations of Regulatory Competition: This chapter establishes the economic framework by analyzing jurisdictions as competitors or monopolies and defining the role of the firm within corporate law.
D. Functioning of Regulatory Competition in Corporate Law: This central chapter explores the conditions, advantages, and problems of regulatory competition, ultimately proposing "modulization" as a solution to cross-border institutional incompatibilities.
E. Conclusion: The conclusion synthesizes the findings, arguing that procedural harmonization and modular legal sectors are essential for fostering innovation and efficient regulatory competition.
Keywords
Regulatory Competition, Corporate Law, European Union, United States, Delaware Effect, New Institutional Economics, Path Dependency, Corporate Charters, Law and Economics, Conflict of Laws, Modulization, Public Choice Theory, Market for Regulations, Agency Problems, Institutional Incompatibilities.
Frequently Asked Questions
What is the core focus of this research paper?
The paper performs a law and economics analysis of regulatory competition in corporate law, specifically investigating how states and member states compete for corporate charters in the US and the EU.
What are the primary thematic pillars of the study?
Key themes include the comparison of US and EU markets, the economic justification for corporate law, the identification of market barriers like information asymmetries, and normative proposals for future reform.
What is the central research question?
The central question is whether the current process of regulatory competition leads to efficient outcomes and what normative reforms, such as procedural harmonization, could improve the efficiency of corporate law systems.
Which theoretical approach does the author employ?
The author primarily utilizes the framework of New Institutional Economics, incorporating public choice theory, dynamic evolutionary economics, and behavioral law and economics.
What topics are covered in the main body?
The main body examines the conditions for functioning competition, identifies advantages like legitimacy and limitation of power, and analyzes significant problems such as interstate externalities and path dependencies.
Which key terms characterize this thesis?
The thesis is characterized by terms such as regulatory competition, corporate charters, path dependency, institutional incompatibilities, and the concept of "modulization" of law.
How does the author define "modulization" in the context of corporate law?
The author defines it as the process of defining clear legal interfaces and constructing modules of legal areas that can be exchanged between jurisdictions without corrupting the functionality of the entire legal order.
Why does the author argue that the European corporate law market differs from the American one?
The author highlights that in the US, states compete within a fairly uniform federal environment, whereas in the EU, member states face greater complexities due to heterogeneous legal systems and a lack of traditional franchise tax incentives.
What role does the European Court of Justice play in the author's argument?
The ECJ is identified as a primary driver of change in the EU, as its rulings from Centros to Inspire Art essentially opened the door for regulatory competition by mandating the recognition of foreign corporate charters.
- Quote paper
- LL.M. Robin Eyben (Author), 2006, Comparative Economic Analysis of Regulatory Competition in Corporate Law in Europe and the United States, Munich, GRIN Verlag, https://www.hausarbeiten.de/document/76250
