Chapter 4 - An Economic Analysis Of The Regulation Of The Establishment Of Companies

Summary

Introduction

The aim of Chapter 4 is to explain government intervention in the establishment process in a single-level jurisdiction in the light of the economic theory of regulation. Chapter 4 discusses whether government intervention in the formation of companies is necessary at all. Moreover, the question will be addressed whether a certain type of regulation is an appropriate remedy to the problems that it aims to tackle.

This chapter looks at two particular ways of regulating establishment: licensing and minimum capital requirements. Licensing as a legal control on entry is widely accepted. Nevertheless, whether licensing is a proportional instrument to tackle market failure also needs to be considered.

Another way of regulating market entry can be to introduce minimum capital requirements. Minimum capital requirements can increase the costs of capital; as a result, business entry may decrease.

The rest of this chapter is structured as follows. Section 2 presents two different approaches concerning regulation as discussed in the law and economics literature: the public interest approach and the private interest approach. It also addresses the main kinds of regulatory controls in the process of business establishment. Section 3 elaborates on whether regulatory intervention in the form of registration, certification and licensing is warranted in the establishment. From a public interest perspective, section 4 looks at the pros and cons of these instruments to tackle market failure in the set-up process, respectively. Having discussed public interest arguments for licensing in the set-up process, section 5 takes into account private interest considerations for employing licensing in the establishment process. Section 6 turns the focus of this chapter to minimum capital requirements. The aim of this section is to see whether minimum capital requirements can be justified on public interest grounds or rather explained on private interest grounds. Section 7 provides conclusions.

Some examples relating to China are treated in chapter 4, but it is not until Part III that this thesis will look into the regulation of the cross-border establishment of companies in China in detail.

Theory of Regulation

The Public Interest Approach

A public interest approach to regulation starts from the assumption that regulation is always aimed at increasing social welfare.