The Political Economy of Competition for Corporate Charters

This article explores the forces that drive the creation of corporate law. Costly rent extractions in corporate laws by interest groups, beyond those attainable through market transactions, raise costs for firms and lower returns for shareholders. Such gains for interest groups can survive only if local firms subject to such laws are protected from firms operating under more efficient legal regimes. Competitive forces from outside a legal system weaken the power of interest groups to engage in rent‐seeking activities and cause the resulting laws to be more public‐regarding. The competitive difference between Europe and the United States is accounted for by the choice of an overarching legal rule for the United States—the presence of a common market, with its absence of tariffs, that makes exit from costly legal regimes by U.S. firms possible. These different competitive settings explain substantive differences in corporate laws.