Academic journal article Economic Inquiry

Evolution and Spontaneous Uniformity: Evidence from the Evolution of the Limited Liability Company

Academic journal article Economic Inquiry

Evolution and Spontaneous Uniformity: Evidence from the Evolution of the Limited Liability Company

Article excerpt

I. INTRODUCTION

Among Armen Alchian's many major contributions to economic analysis is his pioneering application of the principles of biological evolution and natural selection to economics. In his 1950 article, "Uncertainty, Evolution, and Economic Theory," Alchian used evolutionary principles to demonstrate that the standard tools of economics can be directly applied to situations where strong assumptions about individual behavior cannot be made. As Alchian noted:

The essential point is that individual motivation and foresight, while sufficient, are not necessary. All that is needed by economists is their own awareness of the survival conditions and criteria of the economic system and a group of participants who submit various combinations and organizations for the system's selection and adoption.... As a consequence, only the method of use, rather than the usefulness, of economic tools and concepts is affected by the approach suggested here; in fact, they are made more powerful if they are not pretentiously assumed to be necessarily associated with, and dependent upon, individual foresight and adjustment.

Alchian's approach emphasizing the "decisions and criteria dictated by the economic system as more important that those made by individuals in it" is especially relevant to the use of economics to study the creation of law. This approach does not require that one question the importance of rational calculation by actors within the system.(1) Rather, it suggests a more powerful approach to studying the creation of law - one that deemphasizes the motivation or foresight of judges or legislators in favor of a broad consideration of the numerous forces affecting the legal system. Such an evolutionary approach has been used to illustrate how the incentives of litigants can cause judge-made law to evolve towards efficiency without the active participation of judges.(2) Similar "evolutionary" forces can act upon individual legislators and legislatures to produce efficient statutory outcomes. Both competition between interest groups,(3) and competition between jurisdictions can cause statutes to evolve toward efficiency.(4)

Such evolutionary processes are particularly relevant to the creation of uniform laws. A large body of centrally produced federal and uniform state laws have been promulgated as a uniform solution to problems created by diverse state statutes. But there are defects inherent in centralized lawmaking by the federal government and uniform lawmaking bodies.(5) Such uniformity inhibits exit from perverse laws, and thus eliminates an important mechanism through which the evolutionary forces can operate.(6) Thus, it is important to consider whether decentralized processes, such as state jurisdictional competition, can better overcome both incentive and public choice problems and produce efficient uniformity. Yet little is known about the legal evolution of statutory law or the extent to which such decentralized evolution can produce efficient uniformity.(7)

This paper extends the current literature on the decentralized evolution of law by examining whether the process of unguided state provision of statutes for closely held firms leads to interstate uniformity in areas where such uniformity can be expected to promote economic efficiency. Our focus is the recent evolution of the limited liability company statutes, a form of closely held business which combines the benefits of limited liability with the tax advantages of partnership (Ribstein [1992; 1995b], and Ribstein and Keatinge [1992]). We adopt Alchian's suggestion by deemphasizing the often ambiguous predictions of theories based on the behavior of individual market or political actors in favor of an empirical examination of the ultimate evolution of limited liability company statutes. The evidence presented in this paper is consistent with the hypothesis that unguided evolution can achieve uniformity, and that such uniformity occurs when the benefits of uniformity outweigh the costs of reduced variation and experimentation. …

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