Regulatory Competition in Corporate Law: Race to the Top or Bottom?
The competition among jurisdictions for corporate charters represents a natural experiment in regulatory design. Delaware's dominance in the United States and similar dynamics internationally raise fundamental questions about the efficiency of legal rules produced through jurisdictional competition.
The Competitive Dynamic
Charter Competition
Corporations choose their state of incorporation, and states compete for charter fees and related business. This creates pressure to offer attractive legal rules.
Delaware's Dominance
Delaware incorporates over half of U.S. public companies despite its small size. This concentration reflects network effects, specialized courts, and a responsive legislature—advantages that create barriers to entry for competing states.
The Efficiency Debate
Race to the Top
Proponents argue that competition produces efficient rules. States that offer value-destroying rules lose incorporations; states that offer value-enhancing rules attract them. Market discipline ensures quality.
Race to the Bottom
Critics contend that managers—not shareholders—choose incorporation states. Competition therefore caters to managerial preferences, which may diverge from shareholder interests. Anti-takeover statutes exemplify rules that benefit managers at shareholders' expense.
Empirical Evidence
Event Studies
Studies examining stock price reactions to reincorporation decisions yield mixed results. Some find positive reactions to Delaware reincorporation; others find no significant effect.
Governance Quality
Comparisons of governance quality across jurisdictions are complicated by selection effects. Firms that choose Delaware may differ systematically from those that do not.
International Dimensions
European Competition
The European Court of Justice's decisions enabling regulatory competition have sparked debate about whether European corporate law will converge toward efficiency or exploitation.
Offshore Jurisdictions
Competition from offshore jurisdictions raises additional concerns. Regulatory arbitrage may allow firms to escape legitimate regulation rather than merely inefficient rules.
Conclusion
The efficiency of regulatory competition depends on who makes incorporation decisions and what constraints they face. Blanket endorsements or condemnations of jurisdictional competition are equally misguided; careful analysis of specific contexts is required.