Empirical insights into corporate contractarian theory

Abstract

In UK and US company law and corporate governance, a highly influential economic theory views the company, and the rules related thereto, as a nexus of contracts for organising business activity. This so-called contractarian theory of the company depicts fundamental corporate governance arrangements as a form of private ordering, in which rules are spontaneously produced in the absence of formal legal intervention. This paper draws upon broader empirical evidence of real world private ordering to make two essential arguments, which provide much-needed nuance to the idealised view of spontaneous governance found in the contractarian analysis. First, it emphasises the significance of a distinctive and essential correlative and causal connection between hierarchy and the development and nature of private orders. Secondly, it highlights the ways in which the state positively interacts with the purported self-regulatory capability of the market to produce these uneven endogenous rules.