International Regulatory Competition and Coordination: Perspectives on Economic Regulation in Europe and the United States

By Joseph McCahery; Sol Picciotto et al. | Go to book overview

8
Supply-Side Inefficiencies and Competitive Federalism: Lessons from Patents, Yachting, and Bluebooks

IAN AYRES*


INTRODUCTION

The ongoing debate about whether Delaware's dominance in the market for corporate charters is a race to the top or a race to the bottom often turns on whether one believes corporate managers are driven to incorporate (or reincorporate) in the state that provides the most efficient law. William Cary ( 1974) and his followers have argued that managers abuse their discretion to incorporate in states that benefit managerial interests at the expense of shareholder interests; Ralph Winter ( 1977) and his followers (see, e.g., Easterbrook & Fischel 1991) have argued that, because managers' discretion is constrained by promoters or by the threat of a potential takeover, managers will tend to incorporate in states that provide laws which maximize the value of corporate equity.1 Thus, in the end much of the debate about corporate competitive federalism turns out to be a question of agency costs and whether these agency costs are constrained by various forms of market discipline.

This chapter explores different types of inefficiencies that may be generated even if the managers faithfully try to maximize shareholders' interests. Thus, this chapter examines inefficiencies that might persist even if firms were wholly owned by managers--so that there were no separation of ownership from control.2

Extending the image of Roberta Romano ( 1985; 1993) that corporate statutory law is a 'product' supplied by the franchising state and purchased (as an input) by the firm, this chapter focuses on supply-side inefficiencies, whereas the race to the bottom theorists of Cary's ilk focused on the

____________________
*
William K. Townsend Professor of Law, Yale Law School, Jennifer Brown, William Bratton, Jeremy Bulow, Paul David, and Roberta Romano provided helpful comments.
1
Winter himself ( 1989) has recently been careful to temper his earlier race to the top thesis.
2
In an earlier article, I suggested that state legislatures would not compete to supply efficient close corporation law ( Ayres, 1992a). It is important to see that this was at heart a demand-side theory because it argued that close corporations were unwilling for various structural reasons to incorporate in foreign jurisdictions offering value-maximizing law.

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