Abstract
Table of Contents Introduction 630 I. Limited Liability and Economic Efficiency 633 A. The Limited Liability Company and the Law and Economics of Limited Liability 633 1. Efficiency Theory 635 2. Pro Rata Theory 637 3. Efficiency Theory, Pro Rata Theory, and the Limited Liability Company 638 B. The Efficiency Theory of Limited Liability in a Larger Theoretical Context 640 1. The Irrelevance Hypothesis and FirstGeneration Agency Theory 640 2. Limited Liability for Managers and Models of Investor-Manager Incentive Contracts 643 3. Optimal Ownership Structures, Agency Theory, and Limited Liability 647 C. Some Questions About Insurance 652 1. Efficiency Theory 652 2. Pro Rata Theory 654 II. Regulatory Competition and the Limited Liability Company: Law as Domestic Product 657 A. Corporate Charter Competition 658 B. Domestic Incentives: LLCs in an Island Jurisdiction . . . 661 1. Beneficiary Firms 662 2. Costs and Benefits 663 3. Interest Groups 664 4. Predicted Result 666 C. Incentives to Race to the Bottom: LLCs in a Federal System with a Rule of Sirge Reel . .. 667 1. Regulatory Races to the Bottom --Externalities, Preferences, and Prisoner's Dilemmas 667 2. Racing to Externalize with Limited Liability 670 3. Summary ......... 673 D. Incentives to Race to the Top: LLCs in a Federal System 674 1. Corporate Charter Competition as a Model for the Period Between t = 1 and t = 2 674 2. Incentives for the First-Mover State at t = 0 678 3. Incentives to Copy Between t = 0 and t = I 680 E. Summary - LLCs, Regulatory Competition, and Evolutionary Efficiency 682 F. Regulatory Competition and Producer Incentives 684 Conclusion 686 Introduction In an ideal world, inquiry into the efficiency of a legal regime would require the collection and analysis of empirical information concerning costs and benefits. But, due to cost constraints and limits on available means of measurement, fact studies are the exception rather than the rule in law and economics. Instead, legal policy debates respecting efficiency usually deploy economic theories in the absence of determinative empirical evidence. Efficiency emerges as presumption, not as fact. Absent data on costs and benefits, legal policy debates must be resolved by allocating an empirical burden of proof, with the party bearing the burden losing the debate. Participants in such debates draw on the behavioral predictions of economic theory as they search for ways to assure that the burden rests on their opponents' shoulders. Economic models do not come ready-made with burden of proof recommendations keyed to legal policy debates. The models must be translated and adjusted for legal contexts. Historically, these arbitrage exercises have simplified the economics and caused the models to yield clear regulatory or deregulatory policy signals. But as to some heavily traversed subject matter, the passage of time has brought such an accumulation of economic assertions that the presumptive regulatory signal has lost its clarity. Such a mature literature, by virtue of its very complexity, is less well suited to the sustenance of strong policy positions. Policy debates go forward, but clarity of position follows less from the terms of economic theory itself than from the employment of the ordinary tools of normative lawyerly debate. The law and economics of limited liability, with its succession of backand-forth arguments about the location of an efficiency presumption for and against,l presents a literature of this sort. So when Allan Vestal asked us to inquire into the efficiency implications of the recent proliferation of limited liability company (LLC) statutes for this Symposium, we accepted the invitation without making any projection about the exercise's probable results. We hoped that the economic literature, upon de novo review, would yield some new theoretical spin on limited liability - a spin that would provide new advice as to the appropriate location of the legal presumption and that would redirect the back-and-forth legal debate. …