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.
Length: Date of creation: Aug 2006 Date of revision: Handle: RePEc:nbr:nberwo:12455
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Find related papers by JEL classification: D21 - Microeconomics - - Production and Organizations - - - Firm Behavior D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law K2 - Law and Economics - - Regulation and Business Law K22 - Law and Economics - - Regulation and Business Law - - - Corporation and Securities Law L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure N8 - Economic History - - Micro-Business History
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