TY - JOUR AU - Lamoreaux,Naomi R. AU - Rosenthal,Jean-Laurent TI - Contractual Tradeoffs and SMEs Choice of Organizational Form, A View from U.S. and French History, 1830-2000 JF - National Bureau of Economic Research Working Paper Series VL - No. 12455 PY - 2006 Y2 - August 2006 UR - http://www.nber.org/papers/w12455 L1 - http://www.nber.org/papers/w12455.pdf N1 - Author contact info: Naomi R. Lamoreaux Department of Economics Yale University 27 Hillhouse Ave., Rm. 39 Box 208269 New Haven, CT 06520-8269 Tel: 203-432-3625 Fax: 203-432-3635 E-Mail: naomi.lamoreaux@yale.edu Jean-Laurent Rosenthal Division of Humanities and Social Sciences California Institute of Technology 1200 E. California Blvd. MC 228-77 Pasadena, CA 91125 Tel: 626/395-4058 Fax: 626/395-4065 E-Mail: jlr@hss.caltech.edu AB - Today the vast majority of multi-owner firms in the United States are corporations, but that was not the case in the past. Before the advent of the income tax, tort litigation, and significant federal regulation, entrepreneurs more often than not chose to organize as partnerships, a form that economists consider seriously flawed. Why would they make such a terrible mistake? We begin by noting that corporations created new types of contracting problems for businesses at the same time as they solved problems afflicting partnerships. We then model the tradeoffs involved in the choice of corporations versus partnerships and confirm that the model’s assumptions are consistent with U.S. legal rules up through the 1940s. The model implies that partnerships and corporations are complementary organizational forms, and we show that data from the U.S. Census of Manufactures strongly supports that implication. We also verify that the model’s assumptions hold for the broader set of organizational choices available under the French Code de Commerce and use data on multi-owner firms registered in Paris in the 1830s and 1840s to demonstrate the complementary character of the basic forms. Despite much literature emphasizing the fundamentally different environments for business associated with the French and U.S. legal regimes, the basic calculus underpinning the choice of organizational form was the same in both countries. ER -