Friday, September 30, 2005

When econ goes bad inside human brainbridge

I am an unabashed proponent of competitive federalism – i.e., the idea that having corporate law regulated at the state level promotes competition between states seeking to attract corporations to incorporate in their state, which competition tends to lead to efficient legal rules.

Here we have another person who seems to confuse public policy with selling a product. There is no doubt that having "corporate law regulated at the state level has promoted competition between states to attract corporations to incorporate in their state." (Delaware has been very successful in the past, but now Alaska and Nevada have jumped into the game.) However, there is no reason to believe that this has led to "efficient legal rules."

A board of directors decides where the corporation will be incorporated. Boards like laws that favor the board, not necessarily the shareholders (the people who actually own the company), and certainly not the American public. Boards like to find States that make it very difficult to sue board members for malfeasance and make it difficult to kick them out of their jobs, either through elections or sale of the company. Only a fool, or a libertarian, would confuse what is good for a board of directors with what is good public policy.

There can be beneficial experimentation and competition amongst the states, such as each state trying different education strategies, or tort laws, or energy regulation. But in some situations each State may try to gain benefits while shifting the harm to another State -- like a factory that pollutes a nearby river water, there can be negative externalities to allowing unregulated competition. Tiny Delaware gains a bit of tax revenue from having corporations incorporate there, but it is the rest of the nation that must deal with Delaware corporate law.

But anther way, the citizens of each state might be better off with strong corporations law, but each individual state has an incentive to weaken the law, leading to a sub-par outcome.

Professor Brainbridge thinks this is a good thing. In fact, he believes the the regulated company should not only get to choose the law they are regulated under, but choose who will enforce that law. He finds it simply unacceptable that New York Attorney General

Spitzer . . . has assumed jurisdiction over purported wrongdoers without regard to the state in which their firm was incorporated. If his sweeping assertion of regulatory jurisdiction goes unchallenged, Spitzer will have eliminated the exit option that makes competitive federalism work.

I hope competitive federalism stops “working.” This statement is ridiculous. Delaware is a tiny State, less than $1 million people, but many large corporations are incorporated there. Delaware has little incentive to enforce laws that would be beneficial mainly to New York citizens. Delaware and other tiny states have structured their laws to benefit their own citizens at the expense of the rest of the country.

“Competitive federalism” in this case has little to do with efficient regulation, but rather it is a means of eliminating regulation. People like Brainbridge have their reasons for supporting less regulation, but they should accomplish their goals through persuasion rather than setting up a prisoner's dilemma amongst the States.

I would support a national corporations law, but there is no way a law in the public interest will be passed within the next four years.

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