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The Tradeoff Between Ex Ante and Ex Post Transaction Costs: Evidence From Legal Opinions

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  • Benito Arruñada
  • Carlos A. Manzanares

Abstract

Business firms’ formalization has been seen primarily as an entry barrier, which has often led to policies focused on simplifying formalities and creating minimalist company registries. This approach has been criticized on theoretical grounds for ignoring the tradeoff between ex ante registration and ex post transaction costs. This paper tests for the presence of this tradeoff in the context of company registries. In particular, using purpose-built indexes, we test for whether stronger registration requirements decrease the length of lawyer comments on model transactional legal opinions included in an authoritative report on legal opinions created by the International Bar Association. These lawyer comments proxy for due-diligence costs associated with executing large, cross-country company transactions. We confirm the presence of the tradeoff by finding that in countries with less stringent registration requirements, legal opinion comments are longer, even after controlling for the legal origin, European Union affiliation, and the log of per capita GDP.

Suggested Citation

  • Benito Arruñada & Carlos A. Manzanares, 2015. "The Tradeoff Between Ex Ante and Ex Post Transaction Costs: Evidence From Legal Opinions," Working Papers 851, Barcelona Graduate School of Economics.
  • Handle: RePEc:bge:wpaper:851
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    Keywords

    business registries; company law; business formalization; impersonal transactions; information asymmetry; transaction costs; doing business;

    JEL classification:

    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law
    • K23 - Law and Economics - - Regulation and Business Law - - - Regulated Industries and Administrative Law
    • L59 - Industrial Organization - - Regulation and Industrial Policy - - - Other

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