This collaborative, comparative project on the economic consequences of the law of business organizations concerns questions that are now central to debates in law, economics, and history, as well as in the policy arena: how to structure the internal governance and external regulation of business enterprises so as to encourage investment and minimize abuses; and how to promote the creation and growth of innovative small- and medium-sized enterprises (SMEs). The SME plays a central role in this research because its importance has been overlooked in earlier work, and because the implications of organizational law can be especially acute for these firms. The project takes as its point of departure the trade-off that any entrepreneur faces in deciding how to organize a firm. One problem is untimely dissolution, or the chance that the firm will have to wind up business prematurely and thus potentially lose some longer-term investments in technologies and relationships with customers or suppliers. The other problem is that controlling investors might use their power to guide the firm in ways that do not maximizes its value. The corporation as a business entity minimizes the problem of untimely dissolution. But as recent problems of corporate governance illustrate, corporations are often vulnerable to abuse by insiders or by a small group of investors.
This project uses the cases of France, Germany, the United States and the United Kingdom to study the way entrepreneurs have managed this trade-off in different and changing legal environments. The central empirical source for the research consists of samples of articles of association of firms, which contain information on the original investors and governance procedures. This material is supplemented with official sources such as the censuses of manufactures and tax data. A key legal innovation, the private limited-liability company, sheds light on the causes and impact of reforms that shaped the way firms could be created and governed.
Broader impacts: This research has broader impacts for both scholarship and the policy world. The project will help demonstrate the value to law and economics scholars of comparative research based on primary source materials for firms. The general issue, as well as the specific findings concerning SMEs, go right to the heart of a problem facing many poor countries (as well as entities charged with helping poor countries, such as the World Bank). Development economists know that SMEs are crucial to the growth and development of poor economies. Often, however, the legal framework is hostile to the creation of new firms. By showing how the law helped or hindered the formation of new firms in what are now very wealthy countries, the research will help policy-makers advise poorer countries.
