The political economy of competition on corporate charters in Europe

Diploma Thesis, 2010

85 Pages, Grade: 1,0



1 Introduction

2 Institutional competition among governments
2.1 Historic overview
2.2 Externalities and spillovers effects
2.3 Economies of scale and scope
2.4 Incomplete competition and asymmetric information
2.5 Ability to redistribute income
2.6 Political economic aspects
2.7 Innovation and adaptation - regulatory competition as a know- ledge generating process
2.8 Intensity of regulatory competition on company law

3 Economic approaches towards company law
3.1 Theory of the firm
3.2 Economic interpretation of company law
3.3 Limited liability: a characteristic of the corporate forms
3.4 Concluding remarks and implications for interjurisdictional com- petition

4 Competition on corporate charters in the US
4.1 The history of state competition
4.2 Delaware and corporate law making
4.3 Concluding remarks

5 Political economy of competition on corporate charters in Europe
5.1 Legal framework of the mobility of companies in Europe
5.2 Determinants of incorporation decisions
5.2.1 Private limited companies
5.2.2 Public limited companies
5.3 Determinants of states’ behaviour
5.3.1 Monetary incentives
5.3.2 Interest-groups as drivers of legal innovation of regulatory competition
5.3.3 Path dependencies
5.4 Concluding remarks

6 Corporate mobility and regulation in Europe
6.1 Empirical Corporate mobility in the EU
6.1.1 “ Centros limiteds ” in Europe
6.1.2 “ Centros Limiteds ” in Germany
6.2 MoMiG - the 2009 German company law reform
6.2.1 Motivation for MoMiG
6.2.2 MoMiG - a response in a competition on corporate law?
6.2.3 Reception of the UG in Germany
6.3 Concluding remarks

7 Conclusion

List of Figures

2.1 Evolutionary circuit of competition

2.2 Intensity of regulatory competition on company law

4.1 Principal-agent relationship between managers and shareholders

4.2 Financial markets as controlling mechanism

4.3 Delaware and Washington

4.4 Sequences of state competition on corporate charters

5.1 Lawyers’ interest-group and regulatory competition

6.1 Foreign private limited company incorporations in the U.K. (1997- 2006)

7.1 What kind of regulatory competition?

List of Tables

4.1 Event studies of Delaware incorporation

6.1 Private limited companies in Germany (1997-2006)

6.2 Private limited companies in Germany (2000-2005)

6.3 Unternehmergesellschaft vs. Limited (2009)

6.4 Unternehmergesellschaft (2009-2010)

Chapter 1 Introduction

In recent decades, rapidly progressing economic integration has increasingly chal- lenged the traditional distinction between sovereign nation states as monopolistic suppliers of public goods on the one hand and an international sphere on the other hand.1 The aim of economic policy on the national level was to promote the population’s welfare, whereas on the international level economists stressed the positive effects of cross-border division of labour through international trade.2 However, as a consequence of economic integration individuals and businesses are subject to legislation and regulation from a multitude of governmental bodies and layers while the sovereign powers of nation state shrunk because individuals and business became more and more mobile. The strict separation between the national and the international level therefore “ no longer seems to grasp the recent economic, social, and legal developments in a globalised world ” and “ multi-level governance [has] been suggested as an alternative approach ”3.

Multi-level governance is especially important in the European Union where economic integration increased the mobility of persons, firms, and capital enorm- ously while regulatory competences were only partially harmonized. In the field of company law, harmonization has not been successful so far - neither by cre- ating a single substantive body of law nor by harmonization of conflict-of-law rules.4 Therefore, companies were bound to their national company law for a long time. However, several decisions by the ECJ between 1999 and 2003 changed this situation and companies in the EU now have the possibility to use the corporate statutes of other Member States and for the first time regulatory competition on corporate charters seems to be possible.5

Regulatory competition on corporate charters has been an issue in the US for almost 100 years. Firms have long been able to freely choose the corporate statute of any state. On the other hand, states have incentives to provide an attractive company law because they can charge an incorporation fee known as franchise tax on companies registered in their state. On the contrary, EU Member States are not allowed to charge a fee based on incorporation and corporate mobility was until recently limited.6

Multi-level governance approaches are undoubtedly a fruitful means of ana- lysis for the current framework of European company law. However, the question whether such governance regimes should only be a transitory phenomenon or whether they are also preferable as a permanent arrangement is more debated.7 A major argument in favour of regulatory competition is that it promotes innovation and knowledge generation and helps to reduce the constitutional lack of knowledge that all parties, legislators as well as users of company law, are subject to.8 This work analyses the reaction of firms in Germany (demand side) to the recent ECJ case-law and the legislative response of the German government (supply side) in order to determine whether these events suggest that regulatory competition is in fact an innovative and knowledge generating competition process Since company law is a complex “ regulatory product ”, regulatory competi- tion on company law is different from “general” interjurisdictional competition. Thus, the demand side as well as the supply side of this “ market for corporate law ” have to be prudentially analyzed. On the supply side governments seem to have no direct incentives to provide an attractive company law and at the same time they do no not incur substantial costs - government neither seem to have much to win nor much to lose. On the demand side agency problems are likely to mitigate the efficiency of competition, as a party who decides on reincorporation will often not take into account the interests of other parties. Additionally, it is also unclear whether firms are yet completely free in choosing their corporate form or whether cost of corporate mobility are still too high vis-à-vis the benefits from a more attractive company law.

In spite of that, regulatory competition on company law is an academically interesting topic, as free choice of (company) law allows firms to select a very specific set of legal rules (or institutions) detached from the entire legal system and without moving to another location. The accuracy of selection is thus assumably much higher than when particular legal rules are bundled or when individuals have to move physically in order to “ vote by feet ”. Taking all this together, there are four key questions that will be addressed in this work:

1. Are firms on the demand side sufficiently mobile so they can make use of regulatory arbitrage?
2. Why would European governments engage in regulatory competition on corporate charters?
3. Is the MoMiG9 a response of the German legislator within regulatory competition?
4. Finally, do the findings to these questions suggest that regulatory compet- ition on company law is in fact an innovative and knowledge generation process?

To answer those question this work is structured as follows:

- Chapter 2 will summarize the theory of fiscal federalism and interjurisdic- tional competition on a broader scope and outline the main arguments in favour and against federalism and interjurisdictional competition.
- In order to understand the influence of company law on the organization of firms and the coordination of conflicts-of-interest, chapter 3 examines some aspects of the economic theory of the firm and the economic analysis of company law.
- Chapter 4 illustrates the ongoing debate on competition on corporate charters in the US as the experience from the US can at least in part serve a as benchmark for Europe, despite some major structural differences.

Chapters 5 and 6 finally turn to regulatory competition on corporate charters in Europe as such.

- Section 5.1 first describes the legal framework for companies in the EU concerning corporate mobility and free choice of company law. Naturally, within this work the legal status can only be roughly outlined. Moreover, the illustration is restricted to choice of law at the formation of a firm.10 The chapter then continues with the analysis of regulatory competition on charter competition from an political economic perspective. Section 5.2 de- scribes the incentives for choosing a particular company law and the agency problems associated. This section also refers to the differences in agency relationships in publicly-held and privately-held companies. Focusing on the supply side of the market, section 5.3 investigates possible incentives for states or governments to participate in regulatory competition. In want of any appreciable monetary incentives, the influence of interest-groups and path dependencies is likely to be high.

- Chapter 6 finally presents empirical studies on the extent to that choice of company law is exercises laand illustrates the contents of the MoMiG11 as well as the German governments’ motivation for enacting this law. Lastly, also the proliferation of the Unternehmergesellschaft (haftungsbeschr ä nkt) a new corporate form especially addressing start-up enterprises is presented.

- Chapter 7 concludes.

Chapter 2 Institutional competition among governments

Fiscal federalism, institutional competition, and regulatory competition are con- cepts that are linked to the economic analysis of multi-layer government systems as they exist in federations and in economically or politically integrated areas.

Institutional competition is the broadest approach as whole political systems as well as single legal provisions can be defined as institutions.12 Regulatory com- petition on the contrary focuses more specifically on competition of regulations and fiscal federalism “ is concerned with the division of policy responsibsoilities among different levels of government and with the fiscal interactions among these governments ” .13

This chapter will first give a short historic overview on fiscal federalism and then briefly outline the model of politics as a competition process. Thereafter arguments in favour and against interjurisdictional competition will be illustrate.

Section 2.7 is dedicated in particular to problems of limited knowledge and the importance of competition as a knowledge generating process that advances innovation and adaptation which is one of the main arguments in favour of regulatory and institutional competition.

2.1 Historic overview

Fiscal federalism evolved in the 1950s and 1960s and was initially embedded in the neo-classical framework that prevailed at that time.14 Since then, manifold aspects like externalities, public goods, the theory of clubs, optimal taxation, public choice theory, and international economics have been integrated.15 Today, fiscal federalism addresses almost all aspects of fiscal policy and thoughts on various topics of federalism exist in a huge amount all over economics.16

TIEBOUT (1956) is considered the initiator of economic theory of federalism by his seminal work on local expenditures.17 In short, he shows that if individuals are able to choose between different jurisdictions, they will select their state of residence based on the menu of public goods and taxes that best fits their preferences ( “ voting by feet ” ). In doing so, they simultaneously disclose their preferences and theoretically a first-best distribution of individuals according to their preferences throughout a set of jurisdictions can emerge.

In the 1960s, authors like BRETON (1965) focused on the scope of public goods rather than on problems of preferences. BRETON analyzes the optimal provision of public goods subject to their economic scope and the geographical and political structure of jurisdictions. In the case of what BRETON calls a “ per- fect mapping ”, all benefits that derive from a good provided within a unit on a particular level of a federal state (e.g. local, provincial or federal) will inure to the benefit of those individuals living within this particular unit.18 Similarly, MUS- GRAVE (1959) had shown before that an appropriate assignment of jurisdictions over public goods may maximize welfare. Further, OLSON (1969) even proposes different governments for every kind of public good in order to guarantee the abidance by - what he calls - the “ principle of fiscal equivalence ”. To obtain an optimum the cost of additional governmental layers have to be weighted off against allocational benefits from a more elaborate structure. On those grounds, BRETON advocates a sophisticated system of financial grants within a federal system that optimize the provision of public goods. Although such an order will hardly be achievable in practice for lots of reasons19, these works serve as a strong theoretical basis for the economics of federalism and point to reasons why a federal structure may be desirable from an economic point of view.

These early theories that QIAN and WEINGAST (1997) call first generation models20 are all based on a neo-classical, welfare economic framework. Their main focus lies on the definition of economically preferable (mostly static) ar- rangements that might subsequently be implemented by benevolent governments. Later contributions (also called “ second generation models) highlight the problem of political inefficiencies. They portray the political process modeled as political competition as inherently incomplete and inefficient (e.g. due to asymmetric information) and stress that politicians will rather exploite their constituency than implement welfare enhancing policies.21 Thus, even if optimal economic policies were known, this would not mean that they would naturally be pursued22 and federalism - as a means to separate powers - will restrict governments from inefficiently intervening into the market and from providing preferential treatment to particular interest groups.23

A third strand of theories in a “HAYEKIAN tradition” focuses on a so called institutional lack of information that is inherent to any human behaviour or interaction.24 In that sense, neither politicians nor citizens or even observers and theorists are able to attain perfect information. For those theorists competition is a discovery procedure and theories as well as policies are only hypotheses for solving political or economic problems (see below section 2.7).

2.2 Externalities and spillovers effects

Positive externalities such as spillover benefits arise if public goods provided by one jurisdiction, are also beneficiary to citizens or firms outside its borders. Cit- izens inside the jurisdiction may find out about that and settle at the jurisdiction’s borders. As a consequence, while enjoying the same benefits as before, they no longer have to pay for them.25 Such externalities can also result from a situation where citizens from outside a jurisdiction are free to use public goods provided within it, e.g. publicly subsidized theatres or opera houses.26 If the local decision makers ignore such (possitive) spillover effects, a suboptimal amount of public goods will result.27 On the contrary, negative externalities emerge, if taxes and fees raised by a jurisdiction are not only paid by its citizens but also by individuals from outside. Individuals from outside cannot vote on tax policy but have to pay taxes anyway. Therefore, the individuals within the jurisdiction have incentive to raise taxes to a suboptimal level and to externalize the cost of the public goods.28 Externalities can also arise if neighboring states compete on regulations. If a jurisdiction has rather lenient laws on environmental protection, e.g. in order not to put too much cost on its companies, this will higher pollution will usually also affect neighboring countries.29 If states compete on company law and impose particular costs and risks on certain groups of stakeholders who cannot protect themselves against those costs by contract, similar problems can arise.30

Whether externalities are in fact an argument for centralization is lastly an empirical question, as positive and negative externalities can have opposite effects.31 Apart from that, technological and pecuniary externalities have to be distinguished. While technological externalities as e.g. the environmental externalities certainly account for market failure, pecuniary externalities are just a result of a proper working market process and market powers that mitigate monopoly rents.32

2.3 Economies of scale and scope

Economies of scale and scope result from non-rivalry characteristics of public goods. For instance, the quality of public goods does not decrease if more citizens consume them (economics of scope). Often a centralized provision of a great amount of public goods is cheaper than decentral provision.33

Economies of scale and scope point - at least theoretically - towards a central provision of public goods. Nevertheless, there are opposing arguments like the heterogeneity of preferences or contractual solutions. The provision of a public goods on the central level is only optimal if the citizens of the subordinated jurisdiction have the same preferences on the amount of the public good as because the consumption of public goods is by definition non-rival every citizen has to consume the same amount. If, however, citizens in a subordinated jurisdiction favour a high amount of a goods whereas the citizens of the other favour a much lower, either one or both citizens will incur preference costs (see 2.6). Apart from that, economies of scale could also be obtained if two federal states agree on the common provision of just one public good.34 Moreover, empirical studies show that the cost of a lower level provision of public goods are in general overestimated.35

The provision of company law as a public good is also subject to economies of scope. Company law once enacted may be used by an indefinite number of firms. Moreover, the more a particular legal arrangement is used the more case-law and (legal) certainty on how to solve particular problems will emerge (network effects, see e.g. chapter 4). Additionally, the more company law one jurisdiction “produces” the more proficient its government officials become with the task (economies of scale).

2.4 Incomplete competition and asymmetric inform- ation

Another reason why undesired and inefficient outcomes can result from a federal system is asymmetric information. As one side of a market if it has better information may use this advantage opportunistically, the disadvantaged side may refrain from participating in the market and the market mechanism will stop working.36 Problems of asymmetric information can arise between governments and individuals, but also between the participants of a market.

If information is asymmetrically distributed between governments and indi- viduals, governments can first attract individuals to move to their jurisdiction, e.g. by offering favourable combinations of public goods and taxes, and then revoke the preferential law once individuals invested into residing within the jurisdiction and have incurred sunk costs (moral hazard). Mobile individuals or firms will subsequently reduce their activity or demand further credible commitment and the transaction costs in the market rise.37 We will see that credible commitment is important for the ongoing success of Delawere, a state in the US that attracts many companies from all around the US (see section 4). Apart from that, asymmetric information may also cause a market failure in the market on the individual level. Reasons for governments to intervene into incomplete markets are the protection of a disadvantaged side or the enhancement of the informational basis.38 If governments compete on mobile factors by provid- ing favourable regulation, the most lenient regime may prevail and a regulation below optimum level can result (race to the bottom).39 A similar outcome can result if jurisdictions compete for mobile factors on taxes and factors are either completely mobile or completely immobile. Then cutting taxes by a marginal amount will attract all mobile factors and jurisdictions have incentives to lower taxes for mobile factors until a level of zero taxation is reached.40 As we will see, there are company law rules that also aim at the disclosure of important information that is privately held by one party (see section 3.2).

2.5 Ability to redistribute income

Another concern is that federalism and mobility of individuals may undermine governmental redistribution measures. In general (i.e. based solely on their material wealth) rich individuals prefer low redistribution because they have to pay for it and poor individuals prefer high redistribution because they receive net gains from transfers. If states implement different redistribution policies and individuals choose their state of residence according to their preferences, rich people will move to the state with the lowest redistribution while poor people move to the state with the highest redistribution. As a result redistribution in a federation can become completely impossible unless the competence for redistribution policy lies with the federal government (“ death of the insurance state ”).41

Company law rules can also have a redistributive character, for instance because they favour one apparently weaker group and provide special rights or grants to them.42 If the parties who have to pay for this preferential treatment can however opt for another company law regime that does not include such rules, states will not be able to redistribute wealth via company law rules or protect particular parties.

2.6 Political economic aspects

In analogy to the market process, economic theory of democracy describes politics as a competitive process, where demand, i.e. the voters who demand public policy and public goods, and sellers, i.e. the politicians who offer policies, meet. If governments are not benevolent and the political process is incomplete, the relationship between politicians and voters is a pricipal-agent relationship like the relationship between the owners and the managers of a company.43

In contrast to the competition on “real” markets however, citizens are both owners of the firm and consumers of its products.44 Moreover, they can generally not punish governments by denying to buy products. The only option voters have is casting a ballot every few years (“ voice option ”) and within the legislative period politicians are virtually in a monopoly position because oppositions may only throw out criticism or propose alternative measures without simultaneously realizing them.45 Consequently the feedback-mechanism between the voters (buyers) and government (producers) tends to be weaker compared to product markets and politicians can use their discretionary margins for rent-seeking and to the favour of particular interest-groups.

Regulatory competition enables voters to choose policies via voting by feet and forces governments to respond immediately. Voting by feet further restricts politicians, as they are then not only constrained by reelection (“ voice ” or “ polit- ical selection ”) but also through the emigration of individuals (“ exit ” or “ market- type selection ”).46 Emigrations or threads to emigrate can influence the efficiency of a political system in two ways. First, if citizens can articulate their approval or disapproval of policies through leaving the jurisdiction or at least threatening with leaving, politicians have a stronger incentive to bring policies in line with voters’ interests. Second, without individual mobility it may be rational for voters to stay “ ignorant ” and uninformed with respect to political topics because the expected utility of changing the outcome of elections is too small compared to the cost of information.47 The “ exit option ” creates incentives to acquire information on domestic and foreign policies. In addition to the low payoff from domestic elections, individuals can now also increase their utility by moving to another jurisdiction that offers better policies. In contrast to the expected utility from voting, the utility from the moving does not depend on the outcome of a ballot but only on the expected utility of the foreign policy. Even if individuals finally do not move, due to better information the domestic political competition can still be fostered.

2.7 Innovation and adaptation - regulatory com- petition as a knowledge generating process

In contrast to welfare economic models, evolutionary approaches stress the in- novative power of competition and regard competition as a device to mitigate the constitutional lack of knowledge48. Based on the works of SCHUMPETER and HAYEK, competition is seen as an evolutionary process through which new knowledge is generated and spread.49 Competition motivates individuals to search for better solutions, to acquire better information, and to develop innovations.

Still, no one is able to overcome the constitutional lack of knowledge or to attain perfect information and therefore competition is a dynamic process that endo- genously fosters innovation. In that sense, governmental policy measures can be seen as “ intrinsically experimental ”50, as politicians only have a subjective perception of reality and can only guess the effects of policies that in turm may also induce unexpected reactions by voters, firms, etc. .51 From this perspective, competition is a trial-and-error process in which sellers or governments offer “ falsifiable hypotheses ” to match demand.52 In the end, these (political) hypotheses are tested against the preferences of customers (voters or mobile individuals) as “final reality ”.53 On product markets this test is executed by the price mechanism that aggregates the knowledge of all market participants. On political markets policy hypotheses are tested on election day or when individuals use their exit option.54 In contrast to static efficiency as an analytical tool for short-term ana- lysis, for evolutionary economics the dynamic powers of competition that emerge from the incentives of individuals to innovate and acquire information are more important.55

STREIT and WEGNER (1989) portrayed the competition procedure as two parallel processes - an exchange process and a parallel process (see figure 2.1).56 Within the exchange process consumers and sellers meet and prices of products are determined by demand and supply. Using this market mechanism causes trans- action costs, e.g. because sellers have to provide information on their products and buyers have to collect this information in order to consider products to buy.57 As a result of the exchange process sellers experience pecuniary externalities,

illustration not visible in this excerpt

Figure 2.1: Evolutionary circuit of competition according to Streit and Wegner,

Source: Streit and Wegner, 1989, p. 197.

i.e. sellers with successful products experience an increases in sales and sellers of unsuccessful products experience a decline in sales. Although the sellers can obtain this information virtually for free it only gives them a general feedback on their products’ success or failure. In order to draw conclusions on future products, the information has to be decoded. As a result of the exchange process and the external pecuniary effects, sellers have incentives to seek more information, to look for innovations, and to finally put forward new hypotheses (parallel process). If one seller introduces a new and successful product, other sellers are forced to innovate and find new solutions as well or to adopt the opponents’ innovations. Dynamic competition allows for temporary monopoly rent, however, these rents will soon be mitigated by imitation and adaptation. Both processes of the circuit are interconnected. The exchange process induces the parallel process and the other way round. The more intense the exchange process is, the more precise are the sellers’ activities in the parallel process.

The power of competition to promote innovation and adaptation is an im- portant argument in favour of regulatory competition on company law. Company law is a quite complex “regulatory product”, as it consist of a distinctive set of mandatory and voluntary rules (see section 3.2). Therefore, governments will in general not be able to determine optimal sets of company law from the start. Yet, regulatory competition allows them to test their hypotheses against the firms’ needs as firms subsequently choose the arrangements they prefer most. All firms taken to together can generate more (subjective) knowledge on the advantages and disadvantages of a particular company law arrangement than a central government. Firms use company law in practice and thus acquire first-hand information on its quality. On the contrary, governments will not even have precise information on the problems that company law has to address as all their assumption are also only “ falsifiable hypotheses ”. However, governments can attain aggregated information on the quality of their company law through its success in the parallel process.

Regulatory competition does not leave company law complete free to the parties as it would be in a regime with complete party autonomy. Governments can intervene into party autonomy, for instance through mandatory law rules. However, the choice over the company law regime as a whole is left to the parties. All these choice taken together can deliver information on the efficiency and attractiveness of company law arrangements. Moreover, if governments experience pecuniary monetary effects, they have an incentive to search for more efficient arrangements and to adjust their company law to firms needs.

An argument that is put forward in favour of a decentralized governmental organization is that a federal system is more innovative because innovations can be tested in a multitude of small jurisdictions.58 If policies are tested by a small local state, then losses in case of failure will be limited to that particular state, while successful policies can be spread to the entire federation. Since policy experiments can take place in a multitude of states instead of only on the central level, the likelihood that new and innovative policies are discovered is higher.59

However, if states or governments act for their own accounts, incentives to experiment locally are still questionable. Even without regulatory competition, politicians that are restrained by re-election will only execute risky project that increase their re-election probability.60 If a project pays off before the next election, an insecure incumbent may seek risky projects in order to stay in power.61 On the contrary, even risk friendly politicians will act as if they were risk-avers when their reelection is secure and they do not need the risky project to stay in office. This shortcoming of the analogy of political and market-type competition is even stronger in case of regulatory competition. In a federal system incentives to take risks are further mitigated by “ free-riding ”, i.e. adaption of successful policies by other states.62 If other governments are expected to bring up successful innovations, governments have lower incentives to seek to innovate themselves (“ learning externality ”), unless costs of innovations are split or innovations are subsidized by a central government63.


1 See KERBER 2008, p. 1.

2 See FELD and KERBER 2006, p. 2.

3 KERBER 2008, p. 1.

4 See HEINE 2003, pp. 26-7.

5 ECJ 9 March 1999, C-212/97, Centros 1999 ECR I-1459; ECJ 5 November 2002, C-208/00, Überseering 2002 ECR I-9919; ECJ 30 September 2003, C-167/01, Inspire Art 2003 ECR I-10155.

6 Franchise taxes are incompatible with the Directive on Indirect Taxes on the Raising of Capital, Directive 69/335 EEC 1969 . Although fees on incorporations and changes of corporate form are in general exempted from this directive, state may only charge a fee as high as to cover their real expenses, ECJ 20.4.1993, R,. C-71/9 and C-178/91 Potente Carni; ECJ 02.12.1997, C-188/95 Fantask A/S e.a. v Industriministeriet (Erhvervministeriet); see KIENINGER 2002, pp. 186, 188, 189.

7 See KERBER 2008, p. 8.

8 Cf. section 2.7.

9 “ Law for the Modernization of the Private Limited Companies Act and to Combat its Ab use ” - “ Gesetz zur Modernisierung des GmbH-Rechts und zur Bek ä mpfung von Missbr ä uchen ”, Bundesgesetzblatt 2008 Pt. I No. 48, Oct 28, 2008..

10 Surely, especially from a legal perspective, reincorporations of publicly-held companies are an interesting and important topic. They will however not be treated here, as corporate mobility does not seem to be of significant size in this market yet.

11 See fn. 9.

12 Cf. HÖIJER 2008, p. 1.

13 WILDASIN 2008.

14 See STEARNS-BLÄSING 2004, p. 8.

15 BRENNAN and HAMLIN 1998, p. 144.

16 See FELD 2000, p. 25; WILDASIN 2008; For an overview on fiscal federalism see for instance INMAN and RUBINFELD 1997, or OATES 1999.

17 In contrast to that, OATES (1999) thinks that Tiebout’s mechanism of voting by feet is not essential to analyze “ the gains from decentralization, ” because “ although typically enhanced by such mobility, [they] are by no means wholly dependent upon ” party mobility.

18 See BRETON 1965, p.180

19 E.g. because boundaries have emerged in a historical process and cannot be changed easily, even if so, they would have to be altered constantly due to changing economic environments, and because jurisdiction will usually not only provide one single non-private good but many of them.

20 See OATES 1999, p. 350.

21 See TULLOCK 1983 or KOTSOGIANNIS and SCHWAGER 2006b, pp. 779-80.

22 See e.g. BRENNAN and BUCHANAN 1980.

23 See QIAN and WEINGAST 1997.

24 See e.g. STREIT and WEGNER 1989; WOHLGEMUTH 1995;

25 See SINN 1992, p. 192.

26 See FELD and KERBER 2006, p. 18.

27 See WILDASIN 2008.

28 See FELD and KERBER 2006, p. 18.

29 See HEINE 2003, p. 44-5.

30 See HEINE 2003, p. 44-5.

31 See FELD and KERBER 2006, p. 20.

32 See HEINE 2003, p. 45.

33 Either because the central governments itself can realize economies of scale or because it may acquire cheaper prices from private companies.

34 See SCHNELLENBACH 2002a, p. 12.

35 See FELD and KERBER 2006, p. 22.

36 See AKERLOF 1970.

37 See HEINE 2003, p. 47.

38 See AKERLOF 1970; see HEINE 2003, pp. 47-8 for an explanation how the “ lemons ’ problem ” may undermine positive outcomes of regulatory competition.

39 See FELD and KERBER 2006, p. 22.

40 See HEINE 2003, pp. 49-50.

41 Cf. SINN 1992, p. 192.

42 See section 3.2.

43 See BRENNAN and BUCHANAN 2006, p. 26.

44 See HEINE 2003, pp. 40-1.

45 See WOHLGEMUTH 1995, p. 79.

46 Cf. KERBER and VANBERG 1994, p. 202.

47 One individual has hardly a chance to affect an elections outcome. Therefore, individuals have strong incentives either to cast no ballot or to use rules of thumb and not to monitor politicians precisely, cf. DOWNS 1957.

48 See WOHLGEMUTH 1995, p. 73.

49 See KERBER and VANBERG 1994, pp. 197-8; also STREIT 1997; STREIT 2000.

50 KOTSOGIANNIS and SCHWAGER 2006b, p. 781.

51 See STEARNS-BLÄSING 2004, p. 19; cf. SCHNELLENBACH 2002b, pp. 197ff.

52 See STREIT 1997, KERBER 2000, p. 223, HEINE 2003, pp. 43-4. 53 See KERBER and VANBERG 1994, p. 199.

54 See KERBER and VANBERG 1994, p. 202 who highlight the difference between these two types of feedback mechanisms: the political selection, i.e. “ choice among potential alternative institutional regimes through collective political decision procedures ” and “ market-type selection, i.e. “ choice of individuals-or of non-territorial clubs like, for instance, firms-to locate in a particular jurisdiction or to move from one jurisdiction to another. ”.

55 See WITT 2008.

56 See STREIT and WEGNER 1989, pp. 193-8.

57 STREIT and WEGNER 1989, p. 187.

58 Cf. FELD and KERBER 2006, p. 27.

59 See SINN 1992, p. 191.

60 See e.g. SCHNELLENBACH 2002b, p. 204.

61 If the risky project pays off, he will stay in power. If the project fails, he will not be reelected.


63 See also STRUMPF 2002, pp. 208; 218; however KOTSOGIANNIS and SCHWAGER 2006a, pp.493-6 argue that career prospects may countervail these learning externalities, e.g. if governors may run for presidency in the future.

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The political economy of competition on corporate charters in Europe
University of Heidelberg  (Alfred-Weber-Institut)
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regulatory competition, company law, institutional competition, fiscal federalism, MoMiG, competition of corporate charters, competition of company laws
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Thiemo Woertge (Author), 2010, The political economy of competition on corporate charters in Europe, Munich, GRIN Verlag,


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