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The Secret of Growth Is Financing Secrets: Corporate Law and Growth Economics

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  • Robert Cooter
  • Hans Bernd Sch�fer
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    Abstract

    Innovative businesses unite capital and new ideas, which requires overcoming the double trust dilemma: investors fear losing their wealth and innovators fear losing their ideas. To overcome this dilemma, seventeenth-century spice traders invented the joint stock company with an essential feature of modern corporations: entitlements to marketable shares of future profits. Using the corporate form, innovative business ventures can often be organized so that innovators expect to earn more from their share of profits than from stealing the investors’ money, and investors expect to earn more by preserving the company’s secrets than by disseminating them. The corporation thus provides a protected space for holding creative secrets while developing them. By developing the innovations that transform economies, the corporation became the dominant economic form of business organization.

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    File URL: http://www.jstor.org/stable/full/10.1086/663095
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    Bibliographic Info

    Article provided by University of Chicago Press in its journal The Journal of Law and Economics.

    Volume (Year): 54 (2011)
    Issue (Month): S4 ()
    Pages: S105 - S123

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    Handle: RePEc:ucp:jlawec:doi:10.1086/663095

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    Web page: http://www.journals.uchicago.edu/JLE/

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    1. Craig Doidge & G. Andrew Karolyi & Rene M. Stulz, 2001. "Why are Foreign Firms Listed in the U.S. Worth More?," NBER Working Papers 8538, National Bureau of Economic Research, Inc.
    2. Hart, Oliver, 1995. "Firms, Contracts, and Financial Structure," OUP Catalogue, Oxford University Press, number 9780198288817.
    3. Oren Bar-Gill & Michal Barzuza & Lucian Bebchuk, 2002. "The Market for Corporate Law," NBER Working Papers 9156, National Bureau of Economic Research, Inc.
    4. Rafael La Porta & Florencio Lopez-de-Silane & Andrei Shleifer, 1998. "Corporate Ownership Around the World," NBER Working Papers 6625, National Bureau of Economic Research, Inc.
    5. Bengt Holmstrom & John Roberts, 1998. "The Boundaries of the Firm Revisited," Journal of Economic Perspectives, American Economic Association, vol. 12(4), pages 73-94, Fall.
    6. Black, Bernard & Kim, Woochan, 2012. "The effect of board structure on firm value: A multiple identification strategies approach using Korean data," Journal of Financial Economics, Elsevier, vol. 104(1), pages 203-226.
    7. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    8. Bruce Kogut & Udo Zander, 1993. "Knowledge of the Firm and the Evolutionary Theory of the Multinational Corporation," Journal of International Business Studies, Palgrave Macmillan, vol. 24(4), pages 625-645, December.
    9. Nenova, Tatiana, 2003. "The value of corporate voting rights and control: A cross-country analysis," Journal of Financial Economics, Elsevier, vol. 68(3), pages 325-351, June.
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