A theory of the efficiency of jurisdictional choice: the case of corporate federalism

Abstract

The efficiency of the current structure of American orporaton law was investigated. Critics of the current system point to the lack of strict government intervention. into the ongoing affairs of the business corporation as the result of state competition for corporate charters. Such competition is made feasible by the ability of each state to draft corporation laws of its own choosing, and is presumed to have created a system of law which is unfavorable to the interests of stockholders. A theory of the demand for government intervention into private contracting was developed which produced the conclusion that the welfare of contracting parties can only be maximized if they are permitted to choose from a variety of legal environments. Since such choice is only feasible under a federal.system, the efficiency of corporate federalism is established. Tests of.the various implications of the theory of the demand for government intervention were included.