Regulatory competition

Regulatory competition, also called competitive governance or policy competition, is a phenomenon in law, economics and politics concerning the desire of law makers to compete with one another in the kinds of law offered in order to attract businesses or other actors to operate in their jurisdiction. Regulatory competition depends upon the ability of actors such as companies, workers or other kinds of people to move between two or more separate legal systems. Once this is possible, then the temptation arises for the people running those different legal systems to compete to offer better terms than their 'competitors' to attract investment. Historically, regulatory competition has operated within countries having federal systems of regulation - particularly the United States, but since the mid-20th century and the intensification of economic globalisation, regulatory competition became an important issue internationally. Regulatory competition, also called competitive governance or policy competition, is a phenomenon in law, economics and politics concerning the desire of law makers to compete with one another in the kinds of law offered in order to attract businesses or other actors to operate in their jurisdiction. Regulatory competition depends upon the ability of actors such as companies, workers or other kinds of people to move between two or more separate legal systems. Once this is possible, then the temptation arises for the people running those different legal systems to compete to offer better terms than their 'competitors' to attract investment. Historically, regulatory competition has operated within countries having federal systems of regulation - particularly the United States, but since the mid-20th century and the intensification of economic globalisation, regulatory competition became an important issue internationally. One opinion is that regulatory competition in fact creates a 'race to the top' in standards, due to the ability of different actors to select the most efficient rules by which to be governed. The main fields of law affected by the phenomenon of regulatory competition are corporate law, labour law, tax and environmental law. Another opinion is that regulatory competition between jurisdictions creates a 'race to the bottom' in standards, due to the decreased ability of any jurisdiction to enforce standards without the cost of driving investment abroad. The concept of regulatory competition emerged from the late 19th and early 20th century experience with charter competition among US states to attract corporations to domicile in their jurisdiction. In 1890 New Jersey enacted a liberal corporation charter, which charged low fees for company registration and lower franchise taxes than other states. Delaware attempted to copy the law to attract companies to its own state. This competition ended when Woodrow Wilson as Governor tightened New Jersey's laws again through a series of seven statutes. In academic literature the phenomenon of regulatory competition reducing standards overall was argued for by AA Berle and GC Means in The Modern Corporation and Private Property (1932) while the concept received formal recognition by the US Supreme Court in a decision of Justice Louis Brandeis in the 1933 case Ligget Co. v. Lee In 1932 Brandeis also coined the term “laboratories of democracy” in New State Ice Company v. Liebmann, noting that the Federal government was capable of ending experiment. American corporate law scholars have debated on the role of the regulatory competition on corporate law for more than one decade. A Comparative BibliographyIn the United States legal academia, corporate law is conventionally said to be the product of a 'race' among states to attract incorporations by making their corporate laws attractive to those who choose where to incorporate. Given that it has long been possible to incorporate in one state while doing business primarily in other states, US states have rarely been able or willing to use law tied to where a firm is incorporated to regulate or constrain corporations or those who run them. However, U.S. states have long regulated corporations with other laws (e.g., environmental laws, employment laws) that are not tied to where a firm is incorporated, but are based on where a firm does business. From the 'race' to attract incorporations, Delaware has emerged as the winner, at least among publicly traded corporations. The corporate franchise tax accounts for between 15% and 20% of the state's budget. In Europe, regulatory competition has long been prevented by the real seat doctrine prevailing in private international law of many EU and EEA member countries, which essentially required companies to be incorporated in the state where their main office was located. However, in a series of cases between 1999 and 2003 (Centros Ltd. vs. Erhvervs- og Selskabsstyrelsen, Überseering BV v Nordic Construction Company Baumanagement GmbH, Kamer van Koophandel en Fabrieken voor Amsterdam v Inspire Art Ltd.), the European Court of Justice has forced member states to recognize companies chartered in other member states, which is likely to foster regulatory competition in European company law. For instance, in 2008, Germany adopted new regulations on the GmbH (Limited Liability Company), allowing the incorporation of Limited Liability Companies without a minimum capital of EUR 25,000 (though 25% of earnings have to be retained until this threshold is reached). Countries may, for instance, seek to attract foreign direct investment by enacting a lower minimum wage than other countries, or by making the labor market more flexible. Legal scholars often cite environmental law as a field in which regulatory competition is particularly likely to produce a “race to the bottom” due to the externalities produced by changes in any individual state’s environmental law. Because a state is unlikely to bear all of the costs associated with any environment damage caused by industries in that state, it has an incentive to lower standards below the level that would be desirable if the state were forced to bear all of the costs. One commonly cited example of this effect is clean air laws, as states may be incentivized to lower their standards to attract business, knowing that the effects of the increased pollution will be spread across a wide area, and not simply localized within the state. Furthermore, a reduction in the standards of one state will incentivize other states to similarly lower their standards so as to not lose business.