Why Efficiency: A Research Agenda for an Explanatory Account of Default Rules as Choreographers and a Tentative Concept of Regulatory Contractualization

Abstract

This essay is an exercise that fitted into a broader research work the author conducted for her own PhD dissertation. At that time, doctoral researchers at the European University Institute were challenged to think thoroughly about methodology in law. I accepted that challenge. As a consequence, this essay was first and foremost an attempt to conciliate law and economics from the spectrum of game theory. In this essay, I argue that existing default rules often fail to either protect shareholders from collective action problems inside private limited liability companies, or that they prevent shareholders from being able to unload their shares when desired. In other words, the weakness of particular corporate default rules is two-sided. Here, I focus mainly on the first side, that is to say, I address the collective action problem. This is demonstrated with the model of shareholders’ coordination I present herein. With this model, I illustrate how a collective action problem can force shareholders to sell lower than their total valuation of the company because they believe others will sell and, thus, they will lose power over the company’s future policies. At the end, I propose solutions that are meant to stimulate discussion about which design of default rules is more likely to overcome ownership problems deriving from the inefficiency of transfer of shares in private limited liability companies (PLLCs) – the most commonly used private units of economic development.