Homogeneity Effects in Corporate Law

Jens Dammann.

Entrepreneurs enjoy considerable freedom in choosing the rules that will govern their firms. As a general rule, they are able to select not only the state of incorporation, but also the entity type.

When making these choices, entrepreneurs have reason to care about the extent to which other firms are using a particular legal regime. Traditionally, corporate law scholarship on this topic has drawn attention to the relevance of the number of other firms using a given legal regime. Drawing on insights from network theory, Michael Klausner has famously shown that the benefits of a particular legal regime increase as more firms come to use it.

This article does not dispute that the number of other users matters, but argues that the qualitative features of a legal regime’s users are relevant as well: in particular, firms benefit if the users of their chosen legal regime form a relatively homogeneous group. The benefits of such homogeneity come in two flavors. Some homogeneity benefits are ancillary to network benefits; firms profit from homogeneity because more homogeneous networks yield greater benefits. Other homogeneity benefits, however, are independent from network effects in the sense that they do not presuppose the existence of a network. In particular, firm homogeneity increases the predictability of judicial and legislative interventions, and also promises to improve the fit between such interventions and firm needs.

Homogeneity effects are of substantial practical and theoretical interest. They help to explain, or provide efficiency rationales for, a variety of otherwise puzzling or difficult-to-justify phenomena in corporate law. These include the seemingly excessive number of different entity types, the survival of important mandatory norms, and the fact that corporate mobility is observed in some environments but not in others.

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