December 05, 2003

Law professors say (and blog) strange things. . .

I'm so thrilled to be a 1L. Why? Because I'm likely to learn a lot in the next few years. Like, for example, how to argue against the idea of "competitive federalism" described by one of my favorite bloggers, ProfessorBainbridge.

I am an unabashed proponent of competitive federalism i.e., the idea that having corporate law regulated at the state level promotes competition between states seeking to attract corporations to incorporate in their state, which competition tends to lead to efficient legal rules.

(Note to self: must ask how, exactly, "efficient" legal rules differ from "insufficient" legal rules, or "inadequate" legal rules. . .)

Apparently, the idea is that, since states collect franchise taxes from companies that incorporate in their state, they have an incentive to water down their regulations in order to attract more corporations and increase tax revenue:

The basic idea behind competitive federalism is that both efficiency and liberty are promoted when jurisdictions compete for the opportunity to regulate you. . . Corporations pay franchise taxes to the state that incorporated them. The more corporations a state incorporates, the more the state earns in franchise taxes. . . As I have explained before, this competition leads to a race to the top in drafting corporate law rules. Rational investors will not pay as much for securities of firms incorporated in states that do not protect investor interests. As a result, those firms' cost of capital will rise, which gives corporate managers an incentive to incorporate in a state offering rules preferred by investors. Accordingly, competition for corporate charters leads states to adopt efficient corporate laws so as to attract incorporations.

(Note to self: must ask how (or even if) it follows that society benefits when "investor interests" are protected--at the expense of, say, children's interests, retirees' interests, law-student interests, worker interests, and citizen interests generally. Or are these "interests" presumed never to conflict?)

Yes, it's great to be in law school. Soon, I'll understand "competitive federalism" and maybe I'll even like it.

(Note to self: must also remember to ask why we need "competition" to achieve these ends. Aren't investors also voting citizens? Can they not protect their interests at the ballot box, without relying on this so-called "race to the top?" Must ask if there was not maybe a typo. "Top?" Top of what?)

When firms may freely select among multiple competing regulators, oppressive regulation becomes impractical. If one regulator overreaches, as noted above, firms will exit its jurisdiction and move to one that is more laissez-faire. In contrast, when a single regulator can reach all firms, such that exit by the regulated is no longer an option, the essential check on excessive regulation provided by competitive federalism is lost.

Further note: is the assumption that, absent the "check" on "excessive regulation" provided by "competitive federalism," a state government will tend to "excessively regulate?" If this is so, why? Could it be that the normal democratic process will tend to choose regulatory schemes that, in the opinion of the citizens generally, is optimal, but in the opinion of "investors" is "excessive?"

Isn't this a powerful argument against competitive federalism?

Or have I missed something?

Posted by Carey at December 5, 2003 05:47 PM

Great comments guys. Peter FDA

Posted by: Peter at February 20, 2004 08:09 PM