Evolution and spontaneous uniformity: evidence from the evolution of the limited liability company.

Kobayashi, Bruce H. ; Ribstein, Larry E.

I. INTRODUCTION

Among Armen Alchian's many major contributions to economic analysis is his pioneering application of the principles of biological evolution and natural selection to economics. In his 1950 article, "Uncertainty, Evolution, and Economic Theory," Alchian used evolutionary principles to demonstrate that the standard tools of economics can be directly applied to situations where strong assumptions about individual behavior cannot be made. As Alchian noted:

The essential point is that individual motivation and foresight, while sufficient, are not necessary. All that is needed by economists is their own awareness of the survival conditions and criteria of the economic system and a group of participants who submit various combinations and organizations for the system's selection and adoption.... As a consequence, only the method of use, rather than the usefulness, of economic tools and concepts is affected by the approach suggested here; in fact, they are made more powerful if they are not pretentiously assumed to be necessarily associated with, and dependent upon, individual foresight and adjustment.

Alchian's approach emphasizing the "decisions and criteria dictated by the economic system as more important that those made by individuals in it" is especially relevant to the use of economics to study the creation of law. This approach does not require that one question the importance of rational calculation by actors within the system.(1) Rather, it suggests a more powerful approach to studying the creation of law - one that deemphasizes the motivation or foresight of judges or legislators in favor of a broad consideration of the numerous forces affecting the legal system. Such an evolutionary approach has been used to illustrate how the incentives of litigants can cause judge-made law to evolve towards efficiency without the active participation of judges.(2) Similar "evolutionary" forces can act upon individual legislators and legislatures to produce efficient statutory outcomes. Both competition between interest groups,(3) and competition between jurisdictions can cause statutes to evolve toward efficiency.(4)

Such evolutionary processes are particularly relevant to the creation of uniform laws. A large body of centrally produced federal and uniform state laws have been promulgated as a uniform solution to problems created by diverse state statutes. But there are defects inherent in centralized lawmaking by the federal government and uniform lawmaking bodies.(5) Such uniformity inhibits exit from perverse laws, and thus eliminates an important mechanism through which the evolutionary forces can operate.(6) Thus, it is important to consider whether decentralized processes, such as state jurisdictional competition, can better overcome both incentive and public choice problems and produce efficient uniformity. Yet little is known about the legal evolution of statutory law or the extent to which such decentralized evolution can produce efficient uniformity.(7)

This paper extends the current literature on the decentralized evolution of law by examining whether the process of unguided state provision of statutes for closely held firms leads to interstate uniformity in areas where such uniformity can be expected to promote economic efficiency. Our focus is the recent evolution of the limited liability company statutes, a form of closely held business which combines the benefits of limited liability with the tax advantages of partnership (Ribstein [1992; 1995b], and Ribstein and Keatinge [1992]). We adopt Alchian's suggestion by deemphasizing the often ambiguous predictions of theories based on the behavior of individual market or political actors in favor of an empirical examination of the ultimate evolution of limited liability company statutes. The evidence presented in this paper is consistent with the hypothesis that unguided evolution can achieve uniformity, and that such uniformity occurs when the benefits of uniformity outweigh the costs of reduced variation and experimentation.

Our paper suggests an expanded role for unguided jurisdictional competition and less reliance on centralized uniform lawmaking. Our results also suggests the applicability of Alchian's approach to other areas involving the centralized versus decentralized production of uniformity, including the evolution of technological standards (Liebowitz and Margolis [1990; 1994]), and the choice between legal rules and standards (Shavell [1991]).

The organization of the paper is as follows: section II reviews theories of evolution of the closely held firm through jurisdictional competition. Section III provides a theory of the costs and benefits of uniform laws. The theory is used to test whether the recent evolution of limited liability company statutes is consistent with appropriate spontaneous uniformity. Section IV concludes.

II. EVOLUTION OF CLOSELY HELD FIRMS

The evolution of closely held firms confirms Alchian's insight that a study of the "adaptive mechanism" of the market may be more fruitful than that of "individual motivation and foresight." As noted in the introduction, jurisdictional competition can play a potentially large role in the evolution of state statutory law. However, the existing literature on jurisdictional competition has focused primarily on state legislators' motives to maximize estate revenues from chartering public corporations.(8) Commentators have noted that the law can achieve uniformity by firms' moving to favored states, particularly Delaware, and by other states' imitating these states to prevent further losses.(9) They disagree mainly about whether this process is a "race to the bottom" in which the states attract incorporation business by exploiting principal-agent problems resulting from the separation of ownership and control,(10) or a "race to the top" that is disciplined by efficient capital markets.(11)

With respect to closely held firms, by contrast, legislators seem to lack a motive to compete for chartering revenues. Because foreign incorporation is marginally costlier for close corporations than for public corporations, so that few close corporations will choose to incorporate outside the state in which they do business, states with inefficient statutes do not face the threat of loss of incorporation business. Thus, it has been suggested by Ayres [1992] that state legislators will not compete to supply close corporation statutes. It may be that, whatever legislators' motives, lawyers can drive jurisdictional competition.(12) Even so, lawyers in individual states probably lack the knowledge or foresight to know when to adopt uniform rules. Indeed, the rule must first be widely adopted before it becomes uniform.

The previous discussion suggests little reason to expect promulgation of close corporation statutes, much less the evolution of efficient close corporation statutes. Applying Alchian, however, suggests that regardless of the incentives, motivation, or foresight of individual legislators or other lawmakers efficient rules can evolve if the system fosters survival of such rules. As noted in the introduction, adoption of the evolutionary approach does not imply the rejection of rational calculation by individuals within the legal system - indeed Demsetz [1996] rejects the notion that rational behavior and evolution are alternative or substitute explanations of behavior. Rather, it suggests that the survival of efficient rules is fostered by rational behavior of economic actors where the end result is shaped by forces beyond the control or foresight of individual lawmakers or legislatures.(13)

One way in which the system can encourage the survival of efficient rules is if participants in the system - in this case, parties to closely held firms - rationally pursue alternative methods of earning profits. According to the contractual theory of the firm pioneered by Coase [1937; 1960] and by Alchian and Demsetz [1972], firms' choices of contractual arrangements, including their selection of particular business forms and legal default rules, reflect choices influenced by positive transactions and information costs.(14) Contractual terms can be defined by standard statutory forms provided by state or federal law, or in custom agreements. The transaction cost literature predicts that closely held firms will demand uniform or standard statutory forms when the benefits of using customized agreements are small relative to the additional transactions costs that would be incurred in using such agreements.(15) Statutory forms such as the close corporation compete with non-statutory business forms, which, in turn, compete across jurisdictions through the use of contractual choice of law clauses.(16) Transaction cost considerations also determine when firms will demand uniform statutory provisions and when provisions will vary from state to state.(17) Following Alchian's theory, efficient rules will be selected as a result of this process of "jurisdictional" natural selection if the system widely adopts rules that are appropriate for a large number of firms. Ultimately, the extent to which such forces do or do not operate in this or any area remains largely an empirical question.

III. EVIDENCE FROM THE EVOLUTION OF LIMITED LIABILITY COMPANY STATUTES

In this section, we describe a positive theory of desirable and undesirable uniformity. This theory is based on the tradeoff between, on the one hand, uniformity's benefits of reducing information costs, facilitating exchange and improving the allocation of resources, and, on the other, diversity's benefits of increasing flexibility and promoting experimentation and innovation. We then attempt to explain the observed pattern of uniformity found in existing limited liability company statutes using this theory.

After identifying circumstances in which uniformity of statutory provisions relating to business associations would, and would not, be desirable, we review data on limited liability company statutes which show that, even without a uniform proposal from the National Conference of Commissioners on Uniform State Laws, the states have generated greater uniformity in exactly the circumstances transactions cost economics predicts uniform limited liability company provisions would be most desirable. Our examination suggests the pattern of evolution is consistent with appropriate uniformity, and inconsistent with non-efficiency rationales for uniformity, such as herd behavior.

The Benefits of Uniformity

Economic analyses examining the benefits of uniformity have stressed the information and other costs created by diversity. In particular, information costs are generated when parties face a large number of statutory variations among jurisdictions. But these information costs vary among different types of provisions. This forms the basic insight for our test for appropriate uniformity. Uniformity is relatively important for provisions affecting third-party creditors who engage in small, non-recurring transactions with many firms, where the creditors' marginal cost of learning an applicable provision likely exceeds their marginal benefit. Under these circumstances, parties will choose not to obtain the information and will instead apply a discount to reflect uncertainty. Firms have an incentive to avoid this penalty by adopting uniform provisions that reduce transaction costs and uncertainty.(18) By contrast, uniformity is less important regarding provisions that affect the members themselves. The members of closely held firms typically make relatively large investments in few firms and therefore have relatively large marginal benefit and small marginal cost in being informed about each provision. As a result, firms have less of an incentive to adopt uniform provisions of this type.(19)

Owners also may have a tax incentive to adopt uniform provisions. The tax rules for characterizing firms as partnerships require that the firm lack at least two of the "corporate" characteristics of limited liability - centralized management, continuity of life, and free transferability of interest.(20) In order to ensure against adverse tax consequences of surprise characterization of a firm as a corporation, the parties may insist that the firms adhere to a standard form that has been explicitly sanctioned by the Internal Revenue Service. Since almost all limited liability companies have limited liability, tax considerations suggest that limited liability company statutes will tend to ensure that limited liability companies lack at least two of the other corporate characteristics. For example, the vast majority of the statutes provide for a default rule of decentralized management.(21)

The Benefits of Diversity

A second consideration in determining whether uniformity is desirable with respect to a type of statutory provision is whether there are significant benefits from diversity. For some types of provisions it is important only that there is a clear rule, and not precisely what the rule is. For others, there may be a significant question as to what rule is appropriate for particular firms or for firms generally. Indeed, Romano [1992] suggests that close corporation arrangements generally are more idiosyncratic than public corporations, and therefore less amenable to standard statutory forms. Firms may want to be able to select the latter type of provision from a menu of alternatives. Perhaps more important in the context of closely held firms, there may be a need for experimentation among jurisdictions to arrive at the appropriate default rule.

Many of the provisions listed above as involving high benefits of uniformity also involve relatively low benefits of diversity. These rules are designed to provide minimal protection from trade creditors above those provided by bankruptcy or state insolvency law. While there may be some debate about whether such provisions are necessary (Ribstein [1988]), there is little room for variation in the substance of the provisions themselves, and consequently relatively little benefit from state-by-state evolution. For example, the rules provide small trade creditors with a simple fall-back rule that prevents the most egregious cases of debtor misconduct. Because this is only baseline protection, the precise contours of the rule are unimportant. By contrast, many of the provisions listed as involving low benefits of uniformity also involve relatively high benefits of diversity. These include provisions regarding such matters as management form and allocation of voting and financial rights. In fact, these provisions have undergone substantial evolution in the short history of limited liability company statutes.

In contrast to most provisions, tax-motivated provisions involve a conflict between the benefits-of-diversity and the benefits-of-uniformity criteria. There is significant room for evolution and variation in the rules regarding management, transferability and dissolution. Indeed, the tax rules do not provide a strong reason for uniform statutes. Because, as noted above, firms must possess three of four "corporate" features to fail to qualify for partnership tax treatment, many firms may not want to adopt particular tax-compliant features. Moreover, the tax rules themselves provide enough guidance that there may be little need for business associations statutes to mimic these rules. On the other hand, lawyers may prefer uniform rules that ensure tax compliance because they risk potential malpractice liability without incurring the benefits of diversity.(22) Lawyers are a highly coordinated interest group who can further their interests in state legislatures. Accordingly, tax-induced uniformity is less likely to be explained by efficiency considerations than by lawyer-client agency costs.(23)

The Evidence on Limited Liability Company Evolution

This section shows evidence that spontaneous beneficial uniformity through the evolution of limited liability company statutes actually occurs, as predicted by Alchian's theory. Figure 1 shows the total number of states adopting limited liability company statutes and the total number of limited liability company statutes passed over time. In the fifteen year period between 1977 and the end of 1991, only eight states had passed limited liability company statutes. Since a tax ruling opened the floodgates on limited liability companies, forty-seven states and the District of Columbia had passed limited liability company statutes by the end of 1994. These adoptions are listed chronologically in Table I.(24)

Table II lists sixty-nine provisions found in the forty-eight limited liability company statutes, and whether each provision primarily affects the members, primarily affects third parties, or primarily affects the firm's tax liability. The table also lists the number of adoptions of the form contained in the original Wyoming statute, and the number of adoptions of the leading form.(25) Examining Table II, we see that large numbers of states have adopted similar forms of many types of provisions.(26) This evidence strongly refutes theories that suggest close corporation statutes will not be produced by state legislatures, and is consistent with the hypothesis that the states, without the help of a uniform lawmaking body, have recognized and attempted to reduce the costs of diversity by adopting uniform default rules that reduce the transactions and information costs of operating close corporations.(27) However, uniformity also could be consistent with inefficient behavior, a possibility discussed below. Further, many provisions do not have a widely adopted form.(28)

TABLE I
Adoption of Limited Liability Company Statutes

Year Order State Enactment Date

1977 1. Wyoming June 30, 1977
1978 None
1979 None
1980 None
1981 None

1982 2. Florida April 21, 1982

1983 None
1984 None
1985 None
1986 None
1987 None
1988 None
1989 None

1990 3. Colorado April 18, 1990
 4. Kansas May 11, 1990

1991 5. Nevada January 1, 1991
 6. Virginia March 21, 1991
 7. Texas June 16, 1991
 8. Utah July 1, 1991

1992 9. West Virginia March 27, 1992
 10. Iowa April 27, 1992
 11. Minnesota April 29, 1992
 12. Oklahoma May 1, 1992
 13. Maryland May 26, 1992
 14. Arizona June 2, 1992
 15. Louisiana July 7, 1992
 16 Rhode Island July 21, 1992
 17. Delaware July 22, 1992
 18. Illinois September 11, 1992

1993 1R. Wyoming (revised) March 5, 1993
 19. South Dakota March 13, 1993
 20. Montana March 18, 1993
 3R. Colorado (revised) March 22, 1993
 21. Idaho March 26, 1993
 4R. Kansas (revised) April 5, 1993
 22. New Mexico April 7, 1993
 23. Arkansas April 12, 1993
 24. North Dakota April 12, 1993
 25. Michigan April 14, 1993
 26. North Carolina April 23, 1993
 10R. Iowa (revised) April 26, 1993
 27. Indiana May 13, 1993
 11R. Minnesota (revised) May 13, 1993
 7R. Texas (revised) May 19, 1993
 28. Alabama May 20, 1993
 13R. Maryland (revised) May 27, 1993
 29. Nebraska June 2, 1993
 15R Louisiana (revised) June 9, 1993
 12R. Oklahoma (revised) June 11, 1993
 2R. Florida (revised) June 14, 1993
 30. Connecticut June 23, 1993
 31. New Hampshire June 23, 1993
 32. Oregon June 24, 1993
 33. Georgia July 1, 1993
 34. Missouri July 2, 1993
 5R. Nevada (revised) July 9, 1993
 16R. Rhode Island (revised) July 22, 1993
 35. New Jersey July 30, 1993
 36. Wisconsin December 13, 1993

1994 37. Mississippi March 15, 1994
 38. Kentucky March 19, 1994
 39. Ohio April 1, 1994
 40 Washington April 1, 1994
 6R. Virginia (revised) April 5, 1994
 41. Tennessee April 14, 1994
 3R. Colorado (revised) April 19, 1994
 14R. Arizona (revised) April 19, 1994
 42. Maine April 20, 1994
 43. District of Columbia May 18, 1994
 31R. Connecticut (revised) June 7, 1994
 44. Alaska June 8, 1994
 45. South Carolina June 16, 1994
 46. New York July 4, 1994
 47. California September 6, 1994
 48. Pennsylvania December 7, 1994

1995(*) 22R New Mexico (revised) April 5, 199
 32R Oregon (revised) May 5, 1995

* Through May 5, 1995

In order to examine whether spontaneous uniformity has led to appropriate uniformity, we test to see if the amount of uniformity that has developed for the types of provisions identified above correlates with the desirability of uniformity. As noted above, we divide limited liability company provisions into three mutually exclusive categories: those which affect primarily the members; those which affect third parties; and those which are primarily tax motivated. We identify the "uniform" provision for each category of provisions as the one that has the most adoptions.(29) Our theory predicts that if spontaneous [TABULAR DATA FOR TABLE II OMITTED] [TABULAR DATA FOR TABLE III OMITTED] uniformity promotes uniformity in situations where it is most desirable, provisions affecting members will be less uniform than provisions in the third-party or tax categories.

Table III lists the average number of adoptions and the share of the leading form, by category. We hypothesize that the average number of adoptions of the leading form will be smaller for provisions affecting members than for provisions affecting either third parties or the limited liability company's tax status. The data on existing limited liability company statutes are consistent with our hypothesis. The leading form in provisions affecting members are adopted, on average by 23.1 of the forty-eight jurisdictions that have adopted limited liability company statutes as of the end of 1994. That is, the leading form in provisions that affect members on average has a "market share" of less than one half. By contrast, the leading form in provisions affecting third parties or affecting the limited liability company's tax liability is adopted, on average, by thirty of the forty-eight jurisdictions (a share of 62.5 percent).

Table IV lists the difference between the average number of adoptions of the leading form along with a t-statistic testing the null hypothesis that the difference of the means is zero. The null hypothesis that there is no difference between the average number of adoptions of the leading form of the third-party and member categories is rejected at standard significance levels. The difference between the average number of adoptions of the leading form of tax and member provisions is also positive and statistically significant at the .10 level. Finally, the difference between the average number of adoptions of the leading form for third-party and tax provisions is negative, but not statistically different from zero at standard significance levels.(30)

We also examined the development of uniformity over time as new statutes were passed. If spontaneous uniformity has moved the states towards appropriate uniformity, [TABULAR DATA FOR TABLE IV OMITTED] then the theory discussed above predicts that uniformity (measured by the average share of the leading form) will rise for provisions in the third-party category, but that there will be no such movement towards uniformity for provisions in the member category.

The clearest test of evolution of statutory law concerns tax provisions. Lawyers' pressure for tax-compliant provisions is likely to cause at least initial uniformity. Without evolution, this uniformity is likely to persist. By contrast, our theory suggests that profit-seeking firms will seek alternatives to tax-motivated provisions, thereby eroding the market shares of initially popular provisions. However, because uniformity regarding this type of provision is more efficient than for other types of member provisions, our theory suggests that tax provisions ultimately may be more uniform than other member provisions.

The recent adoption history of limited liability company provisions is consistent with these predictions. Figure 2 shows the average share of the leading provision by category over the last three years when most limited liability company statutes have been passed. During this time, the difference between the average share of the leading form for the third party and member categories has increased.(31) The average share of the leading form for provisions in the member category remained relatively constant, rising from 46.8 percent to 48.2 percent during the period February 1992 to May 1995, while the average share of the leading form for provisions in the third-party category increased from approximately 58 to 62.3 percent during the same time period. The leading form share of the tax provisions fluctuated during this time period, showing initial uniformity, a period of diversity when the initial uniform law was being replaced, and finally, a return to the initial level of uniformity of 62.5 percent.

Non-efficiency Explanation for Spontaneous Uniformity

We have shown that the states have tended to move toward uniformity in situations in which our theory suggests uniformity may be desirable. This leaves the question whether the uniform provisions that have emerged are efficient.(32) As suggested above concerning tax-compliant provisions, uniformity may result from political pressure by a dominant interest group - i.e., lawyers. Thus, is it is possible that uniformity may reflect wealth-decreasing rather than wealth-increasing forces.(33)

Spontaneous uniformity may be undesirable for the additional reason that state [TABULAR DATA FOR TABLE V OMITTED] legislators are engaging in "herd" behavior by ignoring their private information and simply adopting prior statutes.(34) If so, the states probably are not evolving toward a more efficient rule because legislators are disregarding the information generated by the experience of other states. The policy implication of either explanation would be that the uniformity promoted by the National Conference of Commissioners on Uniform State Laws, despite its defects, may be superior to spontaneous uniformity that is generated by inefficient early statutes and a simple game of follow-the-leader.

Once again, our data supports Alchian's intuition that overall market processes can produce desirable evolution even when individuals' motivations or foresight are suspect. Our evidence that the states are achieving uniformity in situations where our theory predicts it is efficient to do so suggests that legislators are sorting provisions according to the desirability of uniformity measured by independent criteria, and therefore are using private information rather than blindly following the leader.

Other data can be used to test more directly test the herding hypothesis. One implication of the herding hypothesis is that early statutory forms would have disproportionate influence.(35) That is, the herding hypothesis predicts that the first provisions adopted are likely to be the uniform provisions. Table V suggests this is not the case. Overall, the form initially adopted in the Wyoming statute is the uniform statute in only twenty-four of the sixty-nine provisions. Even more striking, for provisions affecting third parties, the initially adopted form is the uniform form in only 26.5 percent (nine of thirty-four) of the cases. The percentage is much higher for provisions affecting members (just over 45 percent).

Figure 3 illustrates the declining importance of the initial form over time by graphing the average share of the initial and leading (or uniform) form for each type of provision.(36) The path of the average share of initial provisions falls over time for all three types of provisions, while the average share of the uniform provisions consistently rises over time. As our theory predicts, this rise is less pronounced for the provisions that primarily affect members. In the third-party situation, spontaneous uniformity is not evidence of inefficient herding because in this situation the substance of the rule, and therefore legislators' private information about the "right" rule, matters least.

IV. CONCLUSION

The evidence from the recent evolution of the limited liability company shows that passage of state statutes has achieved significant uniformity in those situations predicted as appropriate by the transaction cost model of the firm. Further, the evidence suggests that early statutes do not have a disproportionate effect on subsequent statutes, suggesting that observed uniformity is not the result of inefficient herd behavior These effects occur despite commentators' doubts about motives of individual legislators to produce efficient statutes, consistent with Alchian's intuition about the role of market processes. This strongly suggests that states can achieve desirable spontaneous uniformity without the "help" of uniform lawmaking bodies such as the National Conference of Commissioners on Uniform State Laws or the federal legislature.(37)

1. For a critique of Alchian's attack on the importance of rational calculation, see Demsetz [1996]. Although Alchian questioned the importance of rational calculation, he noted that adoption of the evolutionary approach "does not imply that individual foresight and action do not affect the nature of the existing state of affairs."

2. Much of the economic literature on the evolution of the common law was a direct response to the difficulties involved in defining non-arbitrary preferences of judges. See Rubin [1977], Priest [1977], Landes and Posner [1979], and Cooter and Kornhauser [1980]. For models of judicial behavior, see Posner [1993a; 1993b], Miceli and Cosgel [1994], and Kobayashi and Lott [1993]. The evolutionary approach was also suggested by Oliver Wendell Holmes as a way to examine the progress of the common law. See Elliot [1984]. For an analysis of the choice between judge-made and statutory law, see Rubin [1982].

3. For example, Becker [1976; 1983] suggests that competition in political markets will cause political institutions that lower the cost of producing wealth transfers to survive over time, and that political policies that raise efficiency will be more likely to be adopted than policies that lower efficiency. Lott [1996] suggests, however, that political institutions that have the lowest cost of producing any given level of wealth transfers may not increase wealth, as such institutions can increase total amount and total costs of generating wealth transfers. See also Peltzman [1976].

4. See Hirshleifer [1976] for a discussion of within and between regime political competition as complements. The issue of jurisdictional competition is discussed in more detail below. For analyses of spontaneous evolution of laws, see Benson [1989] and Bernstein [1992].

5. Ribstein and Kobayashi [1995; 1996], Ribstein [1993b], Baysinger and Butler [1984], and Schwartz and Scott [1995] provide recent analyses of uniform lawmaking bodies. Ribstein and Kobayashi [1996] produce evidence that states have been adept at sorting proposals by the uniform lawmaking body, the National Conference of Commissioners on Uniform State Laws (National Conference) and determining when uniformity is likely to increase economic efficiency. Nevertheless, the National Conference's promotional efforts still might cause some uniform provisions to be adopted when uniformity does not promote economic efficiency. Moreover, as Ribstein and Kobayashi [1995] and Schwartz and Scott [1995] found, whether or not even in cases where uniformity could potentially increases economic efficiency, the uniform lawmaking process may tend to produce poorly written laws. For discussions of the problems with federal law, see Macey [1990], Easterbrook and Fischel [1983], and Carlton and Fischel [1983].

6. The classic paper on the benefits of diversity is Tiebout [1956]. See also Easterbrook [1983] and Levmore [1987].

7. For discussions of the incentives of individual legislators see, e.g., Lott [1987], Lott and Reed [1989], Lott and Davis [1992], Kalt and Zupan [1984], Niskanen [1975], Maloney, McCormick and Tollison [1984], and Stigler [1971].

8. For a review of non-corporate jurisdictional competition, see Ribstein [1993a]. Easterbrook [1983] applies the jurisdictional competition model to the state action doctrine in antitrust. For broad-based discussions of the economics of federalism, see Kitch [1981], Rose-Ackerman [1980; 1981], Cover [1981], and Shapiro [1972].

9. See Romano [1985], noting the literature's emphasis on "survivorship," and that as "a corollary of the process's efficient (optimal) outcome, uniform statutes are predicted." Proponents of this view include Easterbrook and Fischel [1983] and Manne [1967]. Some commentators, including Posner and Scott [1980], Easterbrook [1983], and Baysinger and Butler [1985], suggest that diverse public corporation statutes exist to allow different types of firms to select the set of legal rules most appropriate for their particular circumstances. Romano [1985] argues that empirical evidence is inconsistent with these corporate diversity theories, and suggests that partial diversity exists because firms shop for particular types of statutory provisions when they are planning to engage in certain types of transactions. Uniformity clearly has emerged in Canadian corporate law. See Daniels [1991] (arguing that the uniformity resulted from jurisdictional competition) and Macintosh [1993] (arguing that the uniformity resulted from the provinces' lack of incentive to compete to supply corporate law).

10. The original "race to the bottom" hypothesis was stated in Cary [1974]. See also Nader, Green and Seligman [1976]. For a more recent treatment, see Bebchuk [1992]. These articles stress the agency costs created by the separation of ownership and control suggested by Berle and Means [1932]. For general discussions of agency theory and the theory of the firm, see Fama and Jensen [1983a; 1983b], and Jensen and Meckling [1976].

11. For discussion of the race to the top, see Winter [1977]. For empirical evidence favoring the race to the top hypothesis, see Carney [1993], Romano [1985], and Dodd and Leftwich [1980]. For studies of the role of jurisdictional competition in the transition from special chartering to general incorporation, see Shughart and Tollison [1985], and Butler [1985].

12. Romano [1985] and Macey and Miller [1987] note the importance of the demand by lawyer and other professional interest groups in supplementing revenue maximization by the legislature as an incentive for legal change. Further, Ribstein [1993a; 1994] notes the role of contractual choice of law clauses and the incentives of lawyer interest groups in supplying Delaware corporate law. In any event, legislators face such weak incentives to innovate, and taxpayers are such a poorly coordinated group, that maximization of franchise tax revenues is unlikely to be a strong motive for corporate statutes. For a general theoretical discussion of the weak incentives faced by legislators, see Rose-Ackerman, [1980; 1981]. For an application to promulgation of public corporation statutes, see Ribstein [1995b].

13. Indeed, our research on the uniform lawmaking process under the National Conference of Commissioners on Uniform State Laws suggests that attempts by centralized decision makers to shape the ultimate result (i.e. deciding which rules should become uniform) often results in perverse outcomes. See Ribstein and Kobayashi [1996]. Our results suggest that this centralized process results in a large number of uniform law proposals where uniformity is not efficient. Further, these attempts at achieving uniformity are largely unsuccessful, as we find that inefficient uniform proposals are not widely adopted. That is, our results suggest that the decentralized decisions by state legislatures to not adopt these uniform law proposals defeat the inefficient planned actions of the centralized body. For a critique of the National Conference's Uniform Limited Liability Company Act, see Ribstein and Kobayashi [1995].

14. For a clear statement of this proposition, see Easterbrook and Fischel [1992]. While a large literature has examined a firm's contractual choice of control structure using the transactions cost framework, little attention has been paid to the firm's choice of organizational form. It is often assumed that the choice of form merely reflects tax considerations. We take a broader view in this paper by treating the choice of form as reflecting transactions and information costs in addition to tax considerations. See Ribstein [1988; 1992; 1995b].

15. See Ribstein [1994].

16. See Butler [1985] and Ribstein [1995b; 1995c] for an analysis of competition between statutory and non-statutory forms. See Ribstein [1993a; 1994] for a discussion of jurisdictional competition and choice of law clauses.

17. The distinction between issues on which diverse provisions are, and are not, efficient provides a basis for our empirical test of appropriate uniformity.

18. Provisions where uniformity is likely to be important include, for example, simple default terms that minimize the debtor-creditor agency costs inherent in limited liability. Specific examples of provisions in this category include: (1) requirements regarding the contents and execution of the filed document (certificate or articles); (2) limitations on purposes for which the firm may be formed; (3) place and form of filing the basic disclosure document; (4) mechanisms for enforcing obligations (e.g., rules on registered agents and service of process); (5) form of members' capital contributions (i.e., investments that are subordinated to creditor claims); (6) enforcement of capital contribution obligations; (7) definition of and penalties for wrongful distributions to owners by financially distressed firms; (8) members' personal liability for debts of the firm; (9) rules governing "foreign" firms (i.e., those organized under the law of another jurisdiction); (10) rules ensuring accuracy of the disclosure document; (11) regulation of misleading names (i.e., names that might confuse creditors concerning the nature or identity of the firm); (12) limitation on members' or manager's powers to bind the firm; (13) rules for determining what property is owned by the firm; and (14) transfer of firm property. See Table II for a comprehensive list.

19. Examples of these provisions include: (1) formalities and other rules governing the "operating agreement" or similar document that spells out the agreement between the parties but is not intended as notice to third parties; (2) whether the statutory default provides for centralized or decentralized management; (3) the method of allocating profits and distributions; (4) the method of allocating voting rights; (5) matters on which members have a right to vote; (6) rules for meetings of members and managers; (7) rules regarding assignment of interests; (8) fiduciary duties of managers and remedies for breach; (9) dissolution and liquidation of the firm; (10) maintenance and inspection of records.

20. See Treas. Reg. Sec. 301.7701-2(a).

21. See Table II, and Ribstein [1995b]. For discussions of how state legislators tend to design their limited liability company and partnership statutes around federal tax regulations, see Ribstein [1988; 1992; 1994].

22. For a discussion of lawyers' role in resisting flexibility that might trigger malpractice liability, see Ribstein [1994].

23. See Macey and Miller [1987] and Ribstein [1995b]. Tax-based provisions represent a special case for lawyers' collective preference for clear, uniform rules. More generally, successful lawyer interest groups may not prefer simple rules. Increased complexity may increase the demand for lawyers' services in the absence of external sources of guidance (White [1992]). On the other hand, lawyers also have incentives to produce efficient statutes in order to help their states compete for a larger share of the market for state law. See Ribstein [1994; 1995b].

24. Ten states passed new limited liability company statutes in 1992, eighteen states passed new statutes in 1993, and twelve states passed new statutes in 1994. Only Hawaii, Massachusetts, and Vermont had not passed limited liability company statutes by the end of 1994. Further, seventeen states have revised existing statutes since March 1993. For a discussion of the effect of partnership tax classification rules on the terms governing limited liability companies, see Ribstein [1995b].

25. A comprehensive cataloging of the various forms for each of the sixty-nine provisions found in existing limited liability company statutes and listed in Table II was compiled. For a detailed description of limited liability company provisions and forms, see Ribstein and Keatinge [1992]. For example, provision 5, which controls whether or not execution of articles is required, serves to provide simple default rules that minimize debtor-creditor agency costs inherent in limited liability, and is classified as one that primarily affects the limited liability company's interactions with third parties. For each state statute, we recorded whether the statute: (1) requires acknowledgment or verification; or (2) does not require acknowledgment or verification. The Wyoming statute adopted form (2), which is used in eight of the forty-eight jurisdictions. Form (1) is the most adopted or uniform form, adopted by forty jurisdictions.

26. For example, thirteen of the sixty-nine provisions have leading forms that have been adopted by at least thirty-six of the forty-eight jurisdictions, and thirty-nine have leading forms adopted by over half of the states. Note that classification of two statutes as adopting the same form means that the statute falls within the definition of the category, and is judged to have the same legal effect. It does not mean that the language in the statutes are identical. While this approach may arguably overstate the extent to which states have adopted "uniform" statutes, (e.g., due to unforeseen differences in effect or due to differences in statutory interpretation across the states) there is no reason to believe that any existing classification errors are systematically related to whether a provision falls into the third party, member, or tax categories. Instead, a tendency to adhere closely to uniform language may depend on the characteristics of the adopting state. In our examination of the uniform state lawmaking process, we found that states with full-time legislatures were less likely, ceteris paribus, to adopt uniform law proposals. See Ribstein and Kobayashi [1996]. However, an examination of the same factors found no significant correlations between characteristics of a state (e.g., size of legislature, volume of bills, population, general state expenditures) and the rate at which a state adopts the leading form of third-party or member provisions.

27. The states' spontaneous movement towards uniformity is similar to a social convention, where similarity can arise because people recognize the benefits of conforming to a single standard, such as driving on the same side of the road. See Schelling [1960] and Sugden [1986].

28. For example, eight provisions have leading forms with fewer than fifteen adoptions.

29. This is equivalent to the "one-firm" concentration used in many studies in industrial organization. We also report the Herfindahl index, which takes into account the distribution of the provisions. Which index is used does not affect the substantive results of the paper.

30. In comparing the average number of adoptions of the leading form of the member category versus the average number of adoptions of either the third-party or tax categories, the alternative hypothesis is that the average number of adoptions of the member category is less than the average number of adoptions of the third-party or tax categories, suggesting a one-tailed test is appropriate. Our theory does not predict a clear relationship between the degree of uniformity of the third-party and tax categories, suggesting that a two-tailed test is appropriate in this situation. Similar results are obtained if a broader measure of uniformity is used. For example, results using the Herfindahl index are consistent with those obtained by looking only at the leading form. The Herfindahl index for provisions primarily affecting members equals .333. By contrast, the Herfindahl index for provisions primarily affecting third parties or the limited liability company's tax liability equals .485 and .490 respectively.

31. This difference, however, is not statistically significant at standard levels (the t-statistic with 63 degrees of freedom equals .459). We find that 58.8 percent of the third party provisions (20/34) remained equally uniform or became more uniform (as measured by the share of the leading form) over this time period, compared to 54.8 percent (17/31) of member and 50 percent (2/4) of the tax provisions.

32. As noted above, although there is evidence of spontaneous uniformity in the corporate area, it is not clear why this uniformity has developed and, in particular, whether it is efficient. For example, Carney [1993] identified some circumstances which may account for the trend toward diffusion of corporate law provisions, including the role of lawyer and manager interest groups and of the Model Business Corporation Act. The interest group factor may explain why certain types of provisions have been adopted, but it does not explain why there is a move toward uniformity regarding these provisions. The role of the Model Act suggests that uniformity is not necessarily "spontaneous" in these situations.

33. More generally, uniformity may in some cases reduce the costs of rent seeking. See Ribstein and Kobayashi [1996]. The predictions for efficiency in these cases are ambiguous - lowering the costs of transfers decreases the costs of achieving a given level of transfers, suggesting an increase in efficiency. However, decreasing the costs of transfers may increase the total amount and costs of such transfers, and can result in a decrease in efficiency. For a general discussion of these issues, see Lott [1996]. Such problems may be minimized in the limited liability company context by the fact that uniform third-party provisions generally define simple default rules where the content of the rule matters least, and where the wealth-transferring potential present with other mandatory rules is minimized. See Miller [1992] for a similar discussion of the efficiency of close corporation statutes. See Ribstein [1995b] for a more detailed discussion of the efficiency of the content of limited liability company provisions.

35. The theoretical economic literature on technological standards has used examples of the persistence of early inefficient standards to suggest the inefficiency of markets in generating standards in the presence of network effects. The most common example used in the economics literature is the continued dominance of the QWERTY keyboard over the supposedly superior Dovrak keyboard. Theoretical papers suggest that the continued use of QWERTY represents the perpetuation of an inefficient standard, resulting from its early adoption and the inability of market forces to overcome the inertia created by QWERTY-specific human capital. However, Liebowitz and Margolis [1990] present empirical evidence suggesting that the assumptions of the theoretical literature about the relative efficiency of QWERTY are incorrect. See also Liebowitz and Margolis [1994]. While our paper and the literature on network effect both consider the process through with uniformity is produced, our analysis does not consider the role network effects. For an application of the net-work-effects literature to explain the evolution of state corporate law, see Klausner [1995]. Although our evidence of evolution of state statutory standards suggests that there was no "lock-in" of an inefficient early standard, the rules provided by the first limited liability company statutes probably were not sufficiently well established to produce network effects. Network effects in the limited liability company context are better indicated by the statutes' application of partnership rules in order to capitalize on the existing network of partnership customs and precedents. See Ribstein [1995c].

36. The graph uses the form adopted by the Wyoming statute as the initial form. Similar results are obtained if one compares a set of early statutes (e.g., those adopted prior to 1992). Using the leading form from either the first four or first eight statutes as the initial form results in a similar decline, suggesting the absence of a disproportionate influence from this group of early statutes.

37. This question is of some topical interest, as the National Conference recently produced the Uniform Limited Liability Company Act. For analyses an analysis of this uniform act, see Ribstein and Kobayashi [1995] and Ribstein [1995a].

REFERENCES

Alchian, Armen A. "Uncertainty, Evolution, and Economic Theory." Journal of Political Economy, June 1950, 211-21.

Alchian, Armen A., and Harold Demsetz. "Production, Information Costs, and Economic Organization." American Economic Review, December 1972, 777-95.

Ayres, Ian. "Judging Close Corporations in the Age of Statutes." Washington University Law Quarterly, Summer 1992, 365-98.

Banerjee, Abhijit. "A Simple Model of Herd Behavior." Quarterly Journal of Economics, August 1992, 797-817.

Baysinger, Barry D., and Henry N. Butler. "The Role of Corporate Law in the Theory of the Firm." Journal of Law & Economics, April 1985, 179-91.

-----. "Revolution versus Evolution in Corporate Law: The ALI's Project and the Independent Director." George Washington Law Review, May/August 1984, 557-81.

Bebchuk, Lucian A. "Federalism and the Corporation: The Desirable Limits on State Competition in Corporate Law." Harvard Law Review, May 1992, 1435-510.

Becker, Gary S. "A Theory of Competition Among Pressure Groups for Political Influence." Quarterly Journal of Economics, August 1983, 371-400.

-----. "Comment." Journal of Law & Economics, August 1976, 245-48.

Benson, Bruce L. "The Spontaneous Evolution of Commercial Law." Southern Economic Journal, January 1989, 644-61.

Berle, Adolph A., and Gardner C. Means. The Modern Corporation and Private Property. New York: Macmillan, 1932.

Bernstein, Lisa. "Opting Out of the Legal System: Extra Legal Contractual Relations in the Diamond Industry." Journal of Legal Studies, January 1992, 115-57.

Bikhchandani, Sushil, David Hirshleifer, and Ivo Welch. "A Theory of Fads, Fashion, Custom, and Cultural Change as Informational Cascades." Journal of Political Economy, October 1992, 992-1026.

Butler, Henry N. "Nineteenth-Century Jurisdictional Competition in the Granting of Corporate Privileges." Journal of Legal Studies, January 1985, 129-66.

Carlton, Dennis W., and Daniel R. Fischel. "The Regulation of Insider Trading." Stanford Law Review, May 1983, 857-95.

Carney, William J. "Federalism and Corporate Law: Conditions for Optimal Development." Mimeo, Emory University, 1993.

Cary, William. "Federalism and Corporate Law: Reflections upon Delaware." Yale Law Journal, March 1974, 663-705.

Coase, Ronald H. "The Nature of the Firm." Economica, 4(2), 1937, 386-405.

-----. "The Problem of Social Cost." Journal of Law & Economics, October 1960, 1-44.

Cooter, Robert D., and Lewis A. Kornhauser. "Can Litigation Improve the Law with the Help of Judges?" Journal of Legal Studies, January 1980, 139-64.

Cover, Robert M. "The Uses of Jurisdictional Redundancy: Interest Ideology and Innovation." William and Mary Law Review, Summer 1981, 39-682.

Daniels, Ronald J. "Should Provinces Compete: The Case for a Competitive Corporate Law Market." McGill Law Journal, February 1991, 130-90.

Demsetz, Harold. "Rationality, Evolution, and Acquisitiveness." Economic Inquiry, this issue, 1996.

Demsetz, Harold, and Kenneth Lehn. "The Structure of Corporate Ownership: Causes and Consequences." Journal of Political Economy, December 1985, 1155-77.

Dodd, Peter, and Richard Leftwich. "The Market for Corporate Charters: Unhealthy Competition versus Federal Regulation." Journal of Business, July 1980, 259-83.

Easterbrook, Frank H. "Antitrust and the Economics of Federalism." Journal of Law & Economics, April 1983, 23-50.

Easterbrook, Frank H., and Daniel R. Fischel. The Economic Structure of Corporate Law. Cambridge: Harvard University Press, 1992.

-----. "Voting in Corporate Law." Journal of Law & Economics, June 1983, 395-428.

Elliot, E. Donald. "Holmes and Evolution: Legal Process as Artificial Intelligence." Journal of Legal Studies, January 1984, 113-46.

Fama, Eugene F., and Michael Jensen. "Agency Problems and Residual Claims." Journal of Law and Economics, June 1983a, 327-49.

-----. "Separation of Ownership and Control." Journal of Law & Economics, June 1983b, 301-25

Hirshleifer, Jack. "Comment." Journal of Law and Economics, August 1976, 241-44.

Jensen, Michael C., and William H. Meckling. "Theory of the Firm: Managerial Behavior, Agency Costs, and Ownership Structure." Journal of Financial Economics, October 1976, 305-60.

Johnston, Jason. "Notes on the Economic Theory of Legal Evolution." Mimeo, Vanderbilt University, 1993.

Kalt, Joseph P., and Mark A. Zupan. "Capture and Ideology in the Economic Theory of Politics." American Economic Review, June 1984, 279-300.

Kitch, Edmund W. "Regulation and the American Common Market," in Regulation, Federalism and Interstate Commerce, edited by Dan Tarlock. Cambridge: Oelgeschlager, Gun & Hain, 1981.

Klausner, Michael. "Corporations, Corporate Law, and Networks of Contracts." Virginia Law Review, April 1995, 757-852.

Kobayashi, Bruce H., and Lott, John R. Lott, Jr. "Judicial Reputation and the Efficiency of the Common Law." Mimeo, George Mason University, 1993.

Landes, William M., and Richard A. Posner. "Adjudication as a Private Good." Journal of Legal Studies, March 1979, 235-85.

Levmore, Saul. "Variety and Uniformity in the Treatment of the Good-Faith Purchaser." Journal of Legal Studies, January 1987, 43-63.

Liebowitz, S. J., and Stephen Margolis. "The Fable of the Keys." Journal of Law & Economics, April 1990, 1-25.

-----. "Network Externality: An Uncommon Tragedy." Journal of Economic Perspectives, Spring 1994, 133-50.

Lott, John R., Jr. "Political Cheating." Public Choice, February 1987, 169-86.

-----. "When Does Political Reform Increase Wealth?" Public Choice, forthcoming, 1996.

Lott, John R., and Michael Davis. "A Critical Review and an Extension of the Political Shirking Literature." Public Choice, December 1992, 461-84.

Lott, John R., and W. Robert Reed. "Shirking and Sorting in a Political Market with Finite-Lived Politicians." Public Choice, April 1989, 75-96.

Macey, Jonathan R. "Federal Deference to Local Regulators and the Economic Theory of Regulation: Toward a Public Choice Explanation of Federalism." Virginia Law Review, March 1990, 265-91.

Macey, Jonathan R., and Geoffrey Miller. "Toward an Interest-Group Theory of Delaware Corporate Law." Texas Law Review, February 1987, 469-523.

Macintosh, Jeff. "The Role of Interjurisdictional Competition in Shaping Canadian Corporate Law: A Second Look." University of Toronto Working Paper WPS-18, 1993.

Maloney, Michael T., Robert E. McCormick, and Robert D. Tollison. "Economic Regulation, Competitive Governments, and Specialized Resources. Journal of Law & Economics, October 1984, 329-38.

Manne, Henry G. "Our Two Corporation Systems: Law and Economics." Virginia Law Review, March 1967, 259-84.

Miceli, Thomas J., and Metin M. Cosgel. "Reputation and Judicial Decision-Making." Journal of Economic Behavior & Organization, January 1994, 31-51.

Miller, Geoffrey P. "The Economic Efficiency of Close Corporation Law: A Comment." Washington University Law Quarterly, Summer 1992, 399-408.

Nader, Ralph, Mark J. Green, and Joel Seligman. Taming the Giant Corporation. New York: Norton, 1976.

Niskanen, William A. "Bureaucrats and Politicians." Journal of Law & Economics, December 1975, 617-44.

Peltzman, Sam. "Toward a More General Theory of Regulation." Journal of Law & Economics, August 1976, 211-40.

Priest, George. "The Common Law Process and the Selection of Efficient Rules." Journal of Legal Studies, January 1977, 65-82.

Posner, Richard A. The Economic Analysis of Law, 4th. ed. Boston: Little Brown, 1993a.

-----. "What Do Judges and Justices Maximize: The Same Thing as Everyone Else Does." Supreme Court Economic Review, December 1993b, 1-42.

Posner, Richard A., and Kenneth E. Scott. Economics of Corporation Law and Securities Regulation. Boston: Little Brown, 1980.

Ribstein, Larry E. "A Critique of the Uniform Limited Liability Company Act." Stetson Law Review, Winter 1995a, 311-88,

-----. "Statutory Forms for Closely Held Firms: Theories and Evidence from LLCs." Washington University Law Quarterly, Summer 1995b, 369-432.

-----. "Linking Statutory Forms." Law and Contemporary Problems, Spring 1995c, 186-220.

-----. "Delaware, Lawyers, and Contractual Choice of Law." Journal of Corporation Law, 19, 1994, 999-1025.

-----. "Choosing Law by Contract." Journal of Corporation Law, Winter 1993a, 245-300.

-----. "The Mandatory Nature of the ALI Code. George Washington Law Review, April 1993b, 984-1033.

-----. "The Deregulation of Limited Liability and the Death of Partnership." Washington University Law Quarterly, Summer 1992, 417-75.

-----. "An Applied Theory of Limited Partnership." Emory Law Journal, Fall 1988, 835-95.

Ribstein, Larry E., and Robert Keatinge. Ribstein & Keatinge on Limited Liability Companies, New York: Shepards-McGraw Hill, 1992.

Ribstein, Larry E., and Bruce H. Kobayashi. "A Economic Analysis of Uniform State Laws." Journal of Legal Studies, January 1996, 131-99.

-----. "Uniform Laws, Model Laws and Limited Liability Companies." University of Colorado Law Review, June 1995, 947-99.

Romano, Roberta. "Law as Product: Some Pieces of the Incorporation Puzzle." Journal of Law, Economics & Organization, Fall 1985, 225-83.

-----. "State Competition for Close Corporation Charters: A Commentary." Washington University Law Quarterly, Summer 1992, 409-16.

Rose-Ackerman, Susan. "Risk Taking and Reelection: Does Federalism Promote Innovation?" Journal of Legal Studies, June 1980, 593-616.

-----. "Does Federalism Matter? Political Choice in a Federal Republic." Journal of Political Economy, February 1981, 152-65.

Rubin, Paul H. "Is the Common Law Efficient?" Journal of Legal Studies, January 1977, 51-64.

-----. "Common Law and Statute Law." Journal of Legal Studies, June 1982, 205-24.

Scharfstein, David S., and Jeremy C. Stein. "Herd Behavior and Investment." American Economic Review, June 1990, 465-79.

Schelling, Thomas. The Strategy of Conflict. Cambridge: Harvard University Press, 1960.

Schwartz, Alan, and Robert E. Scott. "The Political Economy of Private Legislatures." University of Pennsylvania Law Review, January 1995, 595-654.

Shapiro, Martin. "Toward a Theory of Stare Decisis." Journal of Legal Studies, January 1972, 125-34.

Shavell, Steven. "Specific versus General Enforcement of the Law. "Journal of Political Economy, October 1991, 1088-108.

Shughart, William F., II, and Robert D. Tollison. "Corporate Chartering: An Exploration in the Economics of Legal Change." Economic Inquiry, October 1985, 585-99.

Stigler, George S. "The Theory of Economic Regulation." Bell Journal of Economics and Management Science, Spring 1971, 3-21.

Sugden, Robert. The Economics of Rights, Cooperation and Welfare, New York: Basil Blackwell, 1986.

Tiebout, Charles M. "A Pure Theory of Local Expenditure." Journal of Political Economy, August 1956, 416-24.

White, Michelle J. "Legal Complexity and Lawyers' Benefit from Litigation." International Review of Law and Economics, September 1992, 381-95.

Winter, Ralph. "State Law, Shareholder Protection, and the Theory of the Corporation." Journal of Legal Studies, June 1977, 251-92.

BRUCE H. KOBAYASHI and LARRY E. RIBSTEIN, Associate Professor and Foundation Professor of Law, George Mason University. This paper was prepared for the Western Economic Association's symposium in honor of Armen Alchian's 80th birthday. Support for this research was provided by the Law and Economics Center at George Mason University School of Law. Valuable comments were contributed by Harold Demsetz, Michael Klausner, John Lott, two anonymous referees, and by participants in workshops at Tulane University and North Carolina State University, and at a session of the Western Economic Association Meetings. Omar Gill, Stevan Jones, Gloria Mulligan, Vicki Paisley, Donnell Rini, and Becky Schelhorse contributed valuable research. Any remaining errors are the authors'.