A European Nevada? Bad Enforcement As an Edge in State Competition for Incorporations

Although now possible, no European state is competing for incorporations and this is unlikely to happen in a general fashion. In this paper I argue that, however, the possibility that one state competes for one specific segment of the market for incorporations should not be ruled out altogether. As has happened with Nevada in the U.S., a state could seek to attract companies that are looking for a very protective legal environment for their directors, officers and shareholders. Given the importance of enforcement, I argue that states could compete by capitalising on the inefficiency of their courts, rather than by changing the law on the books. The fact that no investment is necessary would change the perspective on incentives of states to compete: a very small incentive is needed, if the costs are negligible. I also take into account the possible drawbacks of such competition and the reaction other states could have.