Choosing Your Institutional Environment

30 October 2006 at 4:02 pm 2 comments

| Peter Klein |

The new institutional economics typically treats the institutional environment — the background constraints, or rules of the game, that guide individual’s behavior — as exogenous, forming the framework within which individuals act. But what if parties could choose the institutional environment they want?

Physically moving from one country to another constitutes a strong form of institutional-environment selection. A weaker form is “forum shopping,” in which plaintiffs search for jurisdictions with favorable legal rules. (Prominent recent examples include David Irving’s libel suit against Deborah Lipstadt and Richard Perle’s threatened suit against Seymour Hersh.) US firms engage in a kind of forum shopping when they incorporate in Delaware, the state perceived to have the best corporate-chartering and dispute-resolution rules.

A new paper by Geoffrey P. Miller, “The Market for Contracts,” shows that firms most often choose New York as the venue for commercial contracting, making New York “the leading supplier of law and forum in commercial contracts.” Miller argues that New York lawmakers have deliberately designed a contract-law regime that is favorable to commercial transactions. I.e., “New York’s success in attracting choice-of law and forum selection clauses has been due, in substantial part, to the state’s provision of rules, procedures, and adjudicative services deemed attractive by major commercial parties. This explanation parallels the well-known theory that Delaware’s success in the incorporation market is largely due to the superior quality of legal services it provides to its corporate clients.”

Entry filed under: - Klein -, Institutions.

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2 Comments Add your own

  • 1. Bo  |  31 October 2006 at 11:18 am

    This is a topic I have recently tackled in the IJV field (with Globerman, currently under review at JIM), where we show that the quality of the macro-economic environment (what we call host country governance infrastructure) – measured along the lines of economic, legal, political etc stability – moderates the relationship between other relational antecedents and the choice between equity/non-equity modes. Interestingly, we find, however, that this is only true up until a certain threshold (of good governance), after which additional improvements in the host country governance environment has no significant implications for firm’s investment decisions..

  • 2. Peter Klein  |  31 October 2006 at 11:21 am

    Bo, can you post a link to this paper?

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