Corporate Governance and the Plight of Minority Shareholders in the United States Before the Great Depression

Legal records indicate that conflicts of interest -- that is, situations in which officers and directors were in a position to benefit themselves at the expense of minority shareholders -- were endemic to corporations in the late-nineteenth and early-twentieth century U.S. Yet investors nonetheless continued to buy stock in the ever increasing numbers of corporations that business people formed during this period. We attempt to understand this puzzling situation by examining the evolution of the legal rules governing both corporations and the main organizational alternative, partnerships. Because partnerships existed only at the will of their members, disputes among partners had the potential to lead to an untimely (and costly) dissolution of the enterprise. We find that the courts quite consciously differentiated the corporate form from the partnership so as to prevent disputes from having similarly disruptive effects on corporations. The cost of this differentiation, however, was to give controlling shareholders the power to extract more than their fair share of their enterprise's profits. The courts put limits on this behavior by defining the boundary at which private benefits of control became fraud, but the case law suggests that these constraints became weaker over our period. We model the basic differences between corporations and partnerships and show that, if one takes the magnitude of private benefits of control as given by the legal system, the choice of whether or not to form a firm, and whether to organize it as a partnership or a corporation, was a function of the expected profitability of the enterprise and the probability that a partnership would suffer untimely dissolution. We argue that the large number of corporations formed during the late nineteenth and early twentieth centuries were made possible by an abundance of high-profit opportunities. But the large number of partnerships that also continued to be organized suggests that the costs of corporate form were significant.

Comments on Cowen, Hanley, and Voth

Cowen, Hanley, and Voth have so ably summarized their work that I can avoid the exercise. Instead I will attempt what my high school teachers dubbed a commentaire compose, a reasoned discussion of the implications of their work guarded by a few remarks about the potential weaknesses of their analyses. I should note that I never succeeded in garnering a passing grade in the commentaire compose despite having to offer one every fourth week for two years. Still I forge ahead, reviewing the three dissertations in alphabetical order. The topics and periods span some 200 years, a pair of hemisphere, and more countries than I can count on my fingers. Each illustrates a major interest among the members of the EHA: macroeconomics, institutions, and the microeconomics of factor markets. In fact, this batch of dissertations demonstrates that our discipline continues to investigate a broad range of phenomena, with an equally broad range of topics

Le drainage dans le pays d’auge : les conséquences de droits de propriété incertains

[Introduction] On le sait, le drainage permet d’améliorer la productivité agricole. Inversement, son absence constitue souvent un obstacle. Le cas de la France sous l’Ancien Régime en est un bon exemple. De nombreuses terres cultivées auraient sans aucun doute bénéficié d’un meilleur contrôle des eaux et le drainage de marais aurait permis l’extension des terres arables (Meuvret 1967 : 110-114). Pourtant, entre 1700 et 1850 les projets de drainage ont buté sur de graves problèmes institutionnels tant que n’ont pas été redistribués les droits de propriété coutumiers, communaux et privés. Le problème est d’ailleurs comparable quand il s’agit de dessécher des marais ; simplement, il est un peu moins grave car alors seuls les droits coutumiers et communaux sont en cause. Nous analyserons ici en quoi les institutions ont affecté l’assèchement des marais dans le bassin de la Dives en Basse-Normandie

Rural Credit Markets and Aggregate Shocks: The Experience of Nuits St. Georges in Burgundy, 1756-1776

Using a complete enumeration of credit contracts for a rural area in Burgundy, this article examines how credit markets functioned and what role they served. Credit markets distributed funds to a large fraction of the population, and they were organized to mediate problems of asymmetric information. A central constrain on credit markets, however, was the threat of government intervention. Because of this threat, capital markets remained relatively isolated from one another

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

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.

The Fruits Revolution: Property Rights, Litigation and French Agriculture (1700-1860)

Presents a study which attempted to evaluate the French Revolution by examining the political economy of drainage and irrigation. Reason for the lack of investment in agriculture prior to the revolution; Transaction costs involved with improving land; Empirical study of drainage in Normandy from 1700 to 1860

The Development of Irrigation in Provence 1700-1860: The French Revolution and Economic Growth

Quantitative and qualitative evidence suggest that the returns to irrigation in France were similar during the eighteenth and nineteenth centuries. The Old Regime failed to develop irrigation because of fragmented political authority over rights of eminent domain. Since many groups could hold projects up, transaction costs increased dramatically. Reforms enacted during the French Revolution reduced the costs of securing rights of eminent domain