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Contractual Tradeoffs and SMEs Choice of Organizational Form, A View from U.S. and French History, 1830-2000

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  • Naomi R. Lamoreaux
  • Jean-Laurent Rosenthal
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    Abstract

    Today the vast majority of multi-owner firms in the United States are corporations, but that was not the case in the past. Before the advent of the income tax, tort litigation, and significant federal regulation, entrepreneurs more often than not chose to organize as partnerships, a form that economists consider seriously flawed. Why would they make such a terrible mistake? We begin by noting that corporations created new types of contracting problems for businesses at the same time as they solved problems afflicting partnerships. We then model the tradeoffs involved in the choice of corporations versus partnerships and confirm that the model’s assumptions are consistent with U.S. legal rules up through the 1940s. The model implies that partnerships and corporations are complementary organizational forms, and we show that data from the U.S. Census of Manufactures strongly supports that implication. We also verify that the model’s assumptions hold for the broader set of organizational choices available under the French Code de Commerce and use data on multi-owner firms registered in Paris in the 1830s and 1840s to demonstrate the complementary character of the basic forms. Despite much literature emphasizing the fundamentally different environments for business associated with the French and U.S. legal regimes, the basic calculus underpinning the choice of organizational form was the same in both countries.

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    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12455.

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    Date of creation: Aug 2006
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    Handle: RePEc:nbr:nberwo:12455

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    1. Henry Hansmann & Reinier Kraakman, 2000. "The Essential Role of Organizational Law," Yale School of Management Working Papers, Yale School of Management ysm147, Yale School of Management, revised 01 Nov 2001.
    2. Cai, Hongbin, 2003. " A Theory of Joint Asset Ownership," RAND Journal of Economics, The RAND Corporation, vol. 34(1), pages 63-77, Spring.
    3. Demsetz, Harold & Lehn, Kenneth, 1985. "The Structure of Corporate Ownership: Causes and Consequences," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 93(6), pages 1155-77, December.
    4. Forbes, Kevin F, 1986. "Limited Liability and the Development of the Business Corporation," Journal of Law, Economics and Organization, Oxford University Press, Oxford University Press, vol. 2(1), pages 163-77, Spring.
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    7. Alchian, Armen A & Demsetz, Harold, 1972. "Production , Information Costs, and Economic Organization," American Economic Review, American Economic Association, American Economic Association, vol. 62(5), pages 777-95, December.
    8. Naomi R. Lamoreaux, 2005. "Legal Regime and Contractual Flexibility: A Comparison of Business's Organizational Choices in France and the United States during the Era of Industrialization," American Law and Economics Review, Oxford University Press, vol. 7(1), pages 28-61.
    9. Zwiebel, Jeffrey, 1995. "Block Investment and Partial Benefits of Corporate Control," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 62(2), pages 161-85, April.
    10. Yarrow, George K, 1985. "Shareholder Protection, Compulsory Acquisition and the Efficiency of the Takeover Process," Journal of Industrial Economics, Wiley Blackwell, Wiley Blackwell, vol. 34(1), pages 3-16, September.
    11. Patrick Bolton & Ernst-Ludwig von Thadden, 1998. "Blocks, Liquidity, and Corporate Control," Journal of Finance, American Finance Association, American Finance Association, vol. 53(1), pages 1-25, 02.
    12. Marco Pagano & Ailsa Röell, 1998. "The Choice Of Stock Ownership Structure: Agency Costs, Monitoring, And The Decision To Go Public," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 113(1), pages 187-225, February.
    13. Lucian Arye Bebchuk & Allen Ferrell, 2000. "Federalism and Takeover Law: The Race to Protect Managers from Takeovers," NBER Working Papers 7232, National Bureau of Economic Research, Inc.
    14. Patrick Bolton & David S. Scharfstein, 1998. "Corporate Finance, the Theory of the Firm, and Organizations," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 12(4), pages 95-114, Fall.
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    Cited by:
    1. Ran Abramitzky & Zephyr Frank & Aprajit Mahajan, 2009. "Inside the Black Box: Partnerships in Rio de Janeiro, 1870-1891," Discussion Papers, Stanford Institute for Economic Policy Research 08-044, Stanford Institute for Economic Policy Research.

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