Institutional Support of the Firm: A Theory of Business Registries

Abstract

Registering originative business contracts allows entrepreneurs and creditors to choose, and courts to enforce, market-friendly ''contract'' rules that pro-tect innocent third parties when adjudicating disputes on subsequent con-tracts. This reduces information asymmetry for third parties, which enhances impersonal trade. It does so without seriously weakening property rights, because it is rightholders who choose or activate the legal rules and can there-fore minimize the cost of any possible weakening. Registries are essential not only to make the chosen rules public but to ensure rightholders' commit-ment and avoid rule-gaming, because independent registries make rightholders' choices verifiable by courts. The theory is supported by comparative and his-torical analyses.