Research Handbook on the Economics of Corporate Law
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Research Handbook on the Economics of Corporate Law

Edited by Claire A. Hill and Brett H. McDonnell

Comprising essays specially commissioned for the volume, leading scholars who have shaped the field of corporate law and governance explore and critique developments in this vibrant and expanding area and offer possible directions for future research.
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Chapter 14: Transaction Cost Engineers, Loophole Engineers or Gatekeepers: The Role of Business Lawyers After the Financial Meltdown

Richard W. Painter


Richard W. Painter 1. INTRODUCTION Modern commentators have advanced three competing views of transactional lawyers: the ‘transaction cost engineer’ model championed by some law and economics commentators in the 1980s and 1990s, the notion that lawyers are ‘loophole engineers’ in keeping with the longstanding belief that lawyers exploit loopholes in the law for the benefit of clients, and the more paternalistic view that lawyers, along with other professionals such as accountants and investment bankers, are ‘gatekeepers’ who lend their credibility to clients while at the same time protecting capital markets and broader societal interests from client wrongdoing. What do lawyers actually do? As discussed in more detail below, the answer is that lawyers do all three. The three roles are also linked, sometimes reinforcing each other and sometimes undermining each other. The first view, the ‘transaction cost engineer’ model, centers on lawyers’ role in allocating economic risk in business transactions. Most ‘transaction cost’ savings involve shifting transaction risks from one person to another, a shift that usually adds value when risk is transferred to a party better able to understand the risk and to deal with it through insurance, diversification or a similar strategy. Academic literature promoting the transaction cost engineer model uses relatively simple examples of two or three party transactions – often in the mergers and acquisitions context – where lawyers add value by drafting contracts that overcome information asymmetry or some other impediment to efficiently allocating risk. Some transactions, however, are more complex than these simple examples and involve...

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