The Tradeoff between Ex Ante and Ex Post Transaction Costs: Evidence from Legal Opinions

Abstract

Business firms' formalization has been seen primarily as an entry barrier, which has often led to policies focused on simplifying formalities and creating minimalist company registries. This approach has been criticized on theoretical grounds for ignoring the tradeoff between ex ante registration and ex post transaction costs. This paper tests for the presence of this tradeoff in the context of company registries. In particular, using purpose-built indexes, we test for whether stronger registration requirements decrease the length of lawyer comments on model transactional legal opinions included in an authoritative report on legal opinions created by the International Bar Association. These lawyer comments proxy for due-diligence costs associated with executing large, cross-country company transactions. We confirm the presence of the tradeoff by finding that in countries with less stringent registration requirements, legal opinion comments are longer, even after controlling for the legal origin, European Union affiliation, and the log of per capita GDP.

Property Rights in Sequential Exchange

“…As a result, this literature advocates the simplification, if not outright elimination, of formalization procedures. However, a simplified formalization procedure-for instance, a "ministerial" company registry with limited verification-provides less information to market participants on hidden originative contracts, who then must spend more resources in verification and may be subject to greater manipulation ex post (e.g., Arruñada and Manzanares 2016). If that is the case, our model suggests that simplifying formalization procedures may not be optimal when the gains from trade are large.…”

The organization of public registries: a comparative analysis

“…The latter case is relevant to land registries, which are subject to a very special demand, as their direct users (conveyancers and title insurers) may prosper or at least experience an increase in demand as a result of ineffective registries (Arruñada, 2012(Arruñada, :224-28, 2018. Examples abound of registries being captured by the private interests of notaries, conveyancers, and title insurers who provide substitute services, such as title reports and title insurance policies (Arruñada, 2002) and legal opinions (Arruñada and Manzanares, 2016); or even of other public agencies such as cadasters, which constrain registries in their attempt to extend registries' natural monopoly to themselves (Arruñada, 2018). The result is that land registries often show serious dysfunctions, with slow procedures for lodging deeds in recordation offices and long delays in reviewing applications in registration systems (Arruñada, 2012:62-67).…”

How should we model property? Thinking with my critics

“…I disagree because, first, sequential exchange is not caused by the particular characteristics of land and therefore limited to land or even property. Instead, it is a major issue in many other areas, such as agency, commercial and corporate law, organized exchanges, financial instruments, and even family law (Arruñada 2010b, 2012, 2016; Arruñada and Manzanares 2016). Take, for instance, a pure agency context.…”

“…I would submit that the sequential-exchange framework helps to distinguish the enabling and regulatory roles of public ordering (as they are mainly connected, respectively, to exchange and use externalities), and provides an operational way of identifying the comparative advantage, organizational constraints and viable hybridization of private and public ordering solutions. In addition to the cases summarized in the paper, sequential exchange has contributed along these lines to analysing the organization of notaries public (Arruñada 1996, 2007), title insurers (Arruñada 2002), recorders for internet domains (Arruñada 2003: 427), one-stop shops for business formalization (Arruñada 2010a), company registries (Arruñada 2010b, Arruñada and Manzanares 2016), providers of business information (Arruñada 2011), real and intellectual property registers (Arruñada and Hansen 2015), and the consequences of technological change, as recently epitomized by blockchain (Arruñada 2017b).…”