April 22, 2010

The Political Economy of Corporate Charters

  • Molly J. Cohn

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This paper provides a theoretical framework to explain how inter state competition contributed to the wave of general incorporation in the U.S. during the 19th century, and quantitatively tests the hypotheses at the core of this theory. I argue that the move from special to general incorporation can be understood as a tipping model perpetuated by inter-state competition. The states that were the first to "tip" were those most adversely affected by the financial crisis in the late 1830s, and who subsequently faced political pressure to curb systematic corruption; to appease their constituents, legislators opened access to the corporate form by legislating general incorporation. Subsequently, their competitor states feared that their own businesses would vote with their feet, moving to take advantage of the newly implemented general incorporation procedures. The threat of exit motivated these competitor states (that were less hurt by the financial crisis) to abandon special incorporation. Once this next wave of states adopted general incorporation, their competitors were motivated to do so, and so on until all states legislated general incorporation.

Citation (Chicago Style):
Cohn, Molly. "The Political Economy of Corporate Charters." Working Paper, Mercatus Center at George Mason University, 2010.