Choice of Law: An Empirical Analysis

Sarath Sanga

Journal of Empirical Legal Studies, 2014, vol. 11, issue 4, 894-928

Abstract: I propose a new measure to study the law and economics of choice of law: “relative use of law.” Relative use of law measures the extent to which a state's laws are disproportionally over‐ or underutilized in contract. It is constructed by normalizing the distribution of choice of law clauses by the extent of contracting activity within each jurisdiction. Using this measure, I study choice of law by analyzing the nearly 1,000,000 contracts that have been disclosed to the Securities and Exchange Commission between 1996–2012. These are all contracts that companies registered with the SEC deemed “material.” I find that (1) only Delaware and New York are relatively overutilized and (2) firms' choice of law and relative use of law are converging toward Delaware, New York, and Nevada. I offer hypotheses for this convergence that are based on (1) lock‐in effects of the choice of state of incorporation and (2) positive network effects of using the same law. I present suggestive evidence that lock‐in effects explain convergence toward Delaware and Nevada, while network effects explain convergence toward New York.

Date: 2014
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Persistent link: https://EconPapers.repec.org/RePEc:wly:empleg:v:11:y:2014:i:4:p:894-928

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