DP11062 The Emergence of the Corporate Form

Author(s): Giuseppe Dari-Mattiacci, Oscar Gelderblom, Joost Jonker, Enrico C Perotti
Publication Date: January 2016
Keyword(s): capital lock in, corporate form, institutional development, legal innovation, limited liability
JEL(s): G30, K22, N24
Programme Areas: Economic History
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=11062

We describe how the business corporation gradually emerged in the 17th century in response to the need to lock in long-term capital to profit from trade opportunities with Asia. Since contractual commitments to lock in capital were not fully enforceable in partnerships, this evolution required a legal innovation, essentially granting the corporation a property right over capital. Locked-in capital exposed investors to a significant loss of control, and could only emerge where and when political institutions limited the risk of expropriation. The Dutch East India Company (VOC, chartered in 1602) benefited from the restrained executive power of the Dutch Republic and was the first business corporation with permanent capital. The English East India Company (EIC, chartered in 1600) kept the traditional cycle of liquidation and refinancing until, in 1657, the English Civil War put the crown under strong parliamentary control. We show how the time advantage in the organizational form had a profound effect on the ability of the two companies to make long-term investments and consequently on their relative performance, ensuring a Dutch head start in Asian trade that persisted for two centuries. We also show how other features of the corporate form emerged progressively once the capital became permanent.