Sunday, February 28, 2010
Toward a New Law and Economics: The Case of the Stock Market, by Lawrence E. Mitchell, George Washington University - Law School, was recently posted on SSRN. Here is the abstract:
Do the public equity markets play the macroeconomic role we believe them to play? What is the relationship between the U.S. public equity markets and American economic growth? What do these conclusions teach us about the approaches we take and should take in evaluating and designing the laws of corporate governance and securities regulation?
The law and economics paradigm of the last forty years may be mistaken in assuming that economic efficiency on an individual (or institutional) level is sufficient to ensure economic welfare on a macroeconomic level. While legal scholars have carefully and usefully examined the effects of a wide range of regulations on individual and institutional behavior, they have largely done so without considering the broader economic roles individuals and institutions play in building a growing and sustainable economy that creates wealth and jobs. Asking these broader questions may lead to reexamination of the ways in which we encourage the creation of economic institutions and incentives for economic behavior.
This paper exemplifies this new approach through an examination of the role of the U.S. public equity markets, concluding that their contribution to economic growth is highly limited. Public equity markets do not generally finance the formation of productive capital except in the limited, but important, role they play in providing exit opportunities for entrepreneurs and venture capitalists. But I do not accept this conclusion uncritically, noting that even claims for the importance of public equity markets for business creation may well be overstated, and that there is considerable research yet to be done. Moreover, even if the conclusion holds, an overall appraisal of this contribution in the broader context of the public equity markets raise important questions for corporate governance, financial regulation, and the structure of market institutions.