Academic

Corporate law scholars overwhelmingly posit efficiency as the measure of the effectiveness of legal rules when doing normative analysis.  They almost never defend this choice; it goes without question.  Yet, is efficiency really all that matters in setting the rules of corporate law?

Law and economics scholars have a standard argument, due to Kaplow and Shavell, for focusing only on efficiency in setting all sorts of legal rules.  This double distortion argument contends that setting legal rules at their efficient level and then achieving whatever level of redistribution is desired through tax and transfer policies will distort behavior from the efficient level less than if we try to achieve distributive goals in part through legal rules.

Chris Sanchirico and Richard Markovits have already pointed out a number of problems with this argument.  The objection that intrigues me most questions the political feasibility of the Kaplow and Shavell approach. 

For a variety of reasons, pursuing distributive goals through legal rules, including corporate law rules, may be more politically possible than just using tax law to redistribute.  That may be because widely held values or beliefs concerning fairness focus on particular legal rules.  Or, different rulemakers may have more power over some legal rules than over tax policy, and may be inclined to redistribute more than those with control over tax.

Moreover, some legal rules may importantly shape the future distribution of political power.  Setting those rules in a way that creates a more egalitarian system may be crucial to the future feasibility of more egalitarian tax policy.  Some corporate law rules may be important in shaping political power, so this consideration may well be worth pondering in the area of corporate law.

One area where we might care about the distributive consequences of corporate law rules is executive compensation.  I think that distributive concerns largely drive the politics of protests over high executive compensation.  Even corporate law scholars who criticize compensation practices typically distance themselves from that sort of plebeian politics.  I think the plebes are right.