Scandinavian Working Papers in Economics

Ratio Working Papers,
The Ratio Institute

No 299: What matters in Design of Corporate Law

Hanna Almlöf () and Per-Olof Bjuggren ()
Additional contact information
Hanna Almlöf: Linköping University and the Ratio Institute, Postal: Linköping University, And, The Ratio Institute, P.O. Box 5095, SE-102 42 Stockholm, Sweden
Per-Olof Bjuggren: Jönköping International Business School and Ratio Institute, Postal: Jönköping University, Sweden, and, The Ratio Institute, P.O. Box 5095, SE-102 42 Stockholm, Sweden

Abstract: For the corporate business model to be successful, it is important to align the interests of those who control and finance the firm. Corporate law has here an important task to fulfill. It offers a legal framework that can facilitate for parties to conclude mutually preferable agreements at low transaction costs. The purpose of the paper is to show how to design corporate law to fulfill this task. A two-dimension model that simultaneously considers both regulation intensity and the level of default of the corporate law is presented. Earlier literature treats these dimensions separately. By adding a transaction cost perspective to our model, we assess different regulatory techniques and examine how legislation can help corporations by offering a standard contract that lowers transaction costs of contracting. This can be achieved through a legislation that covers most contingencies and take the heterogeneity of firms into consideration. Furthermore, default rules or standards of opt-out character should be combined with other regulatory techniques with lower transaction costs such as opt-in alternatives and menus.

Keywords: Corporate law; regulation; contracts; transaction costs

JEL-codes: D23; G32; G38; K22

26 pages, December 18, 2017

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