Edited by Jürgen Basedow, Giesela Rühl, Franco Ferrari and Pedro de Miguel Asensio
Chapter R.8: Regulatory competition
I. Notion and concept
According to traditional legal theory, law is classified as a public good provided by regulators (courts or judges) in a more or less formal (and ideally democratic) process. In recent years, however, this view of the lawmaking process has been challenged. According to the theory of regulatory competition, law is a product that comes into existence and is shaped by market forces. Based on the economic theory of jurisdictional competition (Charles Tiebout, ‘A Pure Theory of Local Expenditure’ (1956) 64 J.Pol.Econ. 416), the theory assumes that, just like goods and services, legal rules are traded on markets and are subject to the mechanism of supply and demand. Thus, on the demand side, businesses and consumers look for legal rules that meet their needs, while on the supply side, states endeavour to offer such rules. If there is more than one state, the theory of regulatory competition argues, market forces will eventually drive states to compete for application of their laws by adopting rules that suit the needs of businesses and consumers.
From an economic perspective, regulatory competition serves various purposes, all of which are regarded as beneficial and viable. According to neoclassical economic theory, competition for legal rules may – just like competition for goods and services – help to better satisfy individual preferences. Based on the assumption that businesses and consumers will actively shop around for legal rules and regimes, it is claimed that regulatory competition will result in better-tailored and more diverse laws that will allow businesses and consumers to choose their preferred option. According to evolutionary economic theory, regulatory competition may additionally contribute to the ongoing improvement and innovation of legal rules and the legal system as such. Based on the notion of competition as a ‘discovery or learning process’ (Friedrich von Hayek, ‘Der Wettbewerb als Entdeckungsverfahren’ in Karl Friedrich Maier (ed), Freiburger Studien. Gesammelte Aufsätze von F. A. von Hayek (JCB Mohr (Paul Siebeck) 1968) 249), evolutionary economic theory argues that competition is a trial-and-error process of generating knowledge and adjusting legal rules to changing social and economic realities. Finally, evolutionary economic theory also regards regulatory competition as a means to effectively control and limit the powers of regulators and interest groups. This is because competition for legal rules – just like competition for goods and services – ensures diversity and avoids a concentration of powers that might harm businesses and consumers alike.
II. Fundamental requirements
The theory of regulatory competition has recently been applied to a broad range of legal fields. These include tax law, environmental law, labour law and antitrust law, as well as corporate law, contract law, consumer protection and family law (Larry Ribstein and Erin O’Hara, The Law Market (OUP 2008)). To the extent that the theory is applied to private law, private p. 1516international law plays a crucial role. In fact, it is fair to describe private international law as the facilitator of regulatory competition, since regulatory competition may only come into existence if on the demand side, businesses and consumers are allowed to choose between legal rules. If they are not allowed to do so, regulators have no incentive to adjust their laws and to engage in competition with others. It follows that the parties’ freedom of choice granted by private international law (→Choice of law; →Party autonomy) is what sets regulatory competition in motion and what keeps it going. However, the mere existence of freedom of choice on the level of private international law does not suffice to stir regulatory competition. Rather, a number of additional requirements relating to the demand side on the one hand and the supply side on the other hand need to be met. On the demand side, businesses and consumers must actually exercise their freedom of choice. In addition, they must exercise their choice based on the quality of the law or the legal rules in question and not, for example, on their familiarity. On the supply side, the theory further requires that regulators, notably states, are concerned about the application of their laws and are willing to adjust their laws to the perceived needs of businesses and consumers. In sum, ‘for regulatory competition to work we need both responsiveness of economic actors to differences in regulation and responsiveness of regulators to any induced factor movements’ (Konstantine Gatsios and Peter Holmes, ‘Regulatory Competition’ in Paul Newman (ed), The New Palgrave Dictionary of Economics and the Law, vol 3 (Palgrave Macmillan 1998) 271, 274). Unfortunately, in reality, meeting these requirements is far from a matter of course. The reasons for this are manifold.
1. The responsiveness of businesses and consumers
As regards the demand side, the responsiveness of businesses and consumers may very often be absent because choice is costly. In order to make an informed choice, businesses and consumers need to know the differences between various offers, ie the differences between legal rules or entire legal systems. Therefore, they have to gather information about the pertaining rules and regulations and to compare them in order to find out which is the best. Needless to say, this endeavour incurs considerable costs. In addition, the very exercise of a choice is costly. This holds particularly true if a legal rule or an entire legal system cannot be chosen with the help of a choice-of-law clause, but requires physical mobility. In these cases, a choice will incur not only information costs but also costs of moving, as well as costs associated with the loss of social relationships and, as the case may be, the costs of establishing new social relationships, including learning a new language. Since these costs cannot be reduced to zero, it is very unlikely that consumers and businesses will always exercise their freedom of choice. Furthermore, even if businesses and consumers decide to choose a particular law, this does not mean that this choice best matches their preferences. To begin with, legal rules and legal systems are complex phenomena that are at times hard to understand and, what is more, to compare. Businesses and consumers will therefore frequently not choose a legal rule that best satisfies their needs. At times they might not even try to find the best available legal system. Taking into account the costs associated with finding the best available law, they might rather choose a law because they know it or because it is chosen by other people. In all these cases the choice does not perfectly reflect the parties’ preferences and accordingly cannot be classified as a perfect response to the quality of different laws.
2. The responsiveness of regulators
In addition to businesses’ and consumers’ responsiveness, doubts exist as to regulators’ responsiveness (Eva-Maria Kieninger, Wettbewerb der Privatrechtsordnungen im Europäischen Binnenmarkt (Mohr Siebeck 2002); Stefan Vogenauer, ‘Regulatory Competition through Choice of Contract Law and Choice of Forum in Europe: Theory and Evidence’ (2013) 21 ERPL 13). To begin with, it is difficult to see why regulators should engage in regulatory competition at all. If businesses and consumers fail to choose legal rules either at all or for their quality, why should regulators care about changing their laws to make them more attractive to businesses and consumers? In addition, according to standard economic theory, regulators (notably states) need incentives to adjust their laws to the perceived needs of businesses and consumers. However, it is not obvious where these incentives may come from in the field of private law. Naturally, in p. 1517some areas (notably corporate law) states may obtain revenue from filing fees and, as the case may be, from franchise tax. However, it is unclear how states may benefit from the application of other aspects of their private laws, notably their contract of family. The only possible source of income seems to be an increase in tax revenue resulting from more local lawyers working on international contract cases. However, it is unclear whether these additional gains, assuming they materialize at all, are sufficient to induce states to adjust their contract laws.
Furthermore, even if states have a financial incentive to adjust their laws, they might face difficulties in doing so in practice. This is because states are in no position to take note of party choice across the board and to identify the causes for the choice of a particular law. Most choice-of-law clauses are not published or publicly available, and to the extent that they are available, they fail to illuminate the reasons for a particular choice. In company law, for example, a choice of one state’s company law is either effectuated through incorporation of the company or through establishment of the country’s real seat in that state (→Companies). However, the mere incorporation or relocation tells us nothing about factors that drive the choice. Therefore, the only means of obtaining the relevant information about party motivation in choosing a particular law are large-scale surveys. However, such surveys are difficult and correspondingly costly to conduct. In addition, they do not necessarily lead to useful results since businesses and consumers might have different reasons for choosing a particular law. Thus, states may experience difficulties in adjusting their laws in a targeted fashion to the preferences of private actors.
3. Empirical evidence
The above considerations shed a rather dark light on regulatory competition, its actual existence and its ability to enhance legal rules and legal systems. When looking at the empirical evidence, however, the picture is more promising. In fact, it would seem that in many areas of private law, regulatory competition can actually be observed (Larry Ribstein and Erin O’Hara, The Law Market (OUP 2008)). Take, for example, corporate law in the USA. Here, scholars broadly agree that states compete for corporate charters, with Delaware taking the lead (Roberta Romano, The Genius of American Corporate Law (Aei Press 1993)). In Europe, by contrast, scholars tend to be more sceptical (Eva-Maria Kieninger, Wettbewerb der Privatrechtsordnungen im Europäischen Binnenmarkt (Mohr Siebeck 2002)). However, following a number of ECJ judgments effectively allowing companies to incorporate and move freely within the EU, English limited liability companies immediately became extremely popular, prompting several European states including Germany and France to enact new corporate laws in response (Wolf-Georg Ringe, ‘Corporate Mobility in the European Union – A Flash in the Pan? An Empirical Study on the Success of Law Making and Regulatory Competition’  ECFR 230). Against this background, the majority view today is that there is also competition for corporate charters in Europe (Horst Eidenmüller, ‘The Transnational Law Market, Regulatory Competition, and Transnational Corporations’ (2011) 18 Ind.J.Global L.Stud. 707).
The position is more complicated regarding other fields of private law, notably contract law. Here, a number of prominent German scholars have recently expressed doubts as to whether states actually engage in regulatory competition (Eva-Maria Kieninger, Wettbewerb der Privatrechtsordnungen im Europäischen Binnenmarkt (Mohr Siebeck 2002); Stefan Vogenauer, ‘Regulatory Competition through Choice of Contract Law and Choice of Forum in Europe: Theory and Evidence’ (2013) 21 ERPL 13).
Regarding the demand side, these scholars argue that it is less the quality of the law that drives private actors’ choice than familiarity with the chosen law. Regarding the supply side, they claim that states lack the incentives and willingness to adjust their contract laws to private actor needs. However, these arguments miss the point for two reasons (Giesela Rühl, ‘Regulatory Competition in Contract Law: Empirical Evidence and Normative Implications’ (2013) 9 ERCL 61). First, there is empirical evidence that the quality of the law is at least one of the factors driving party choice. Naturally, familiarity is also important and, according to some studies, even more important. But in order to stir regulatory competition, the quality of the law need not be the only or the most important factor for a choice of law; it merely needs to be a sufficiently important one for a sufficiently large number of businesses and consumers. In fact, regulatory p. 1518competition would only be excluded if all parties based their choice exclusively on the familiarity of the chosen law. However, according to the studies just mentioned, this is clearly not the case. Second, there is empirical evidence that states actually have an interest in the application of their contract laws and that they are actually willing to adjust their laws to the perceived needs of businesses and consumers. To begin with, several states, including the →United Kingdom, →France and →Germany, have recently engaged in what has become known as the ‘battle of the brochures’. In a series of publications they describe the advantages of their respective contract laws vis-à-vis the contract laws of other states (Law Society of England and Wales, England and Wales: The Jurisdiction of Choice (2008); Bundesnotarkammer and others, Law – Made in Germany. Global. Effective. Cost-Efficient (2009, 2012 and 2014). In addition, and more importantly, a large number of states, including →Germany, →Estonia, →Hungary, →Lithuania, the →Netherlands, →Poland and →Romania, have partly or wholly revised their contract laws over the last two decades in order to render them ‘fit for Europe’. Empirical evidence thus suggests that there is also regulatory competition in contract law – and arguably beyond.
III. Potential effects
The original theory of regulatory competition assumes that competition for legal products will always enhance efficiency and thus induce what has been termed a ‘race to the top’. More specifically, the theory assumes that regulatory competition will support the evolution of legal rules that satisfy business and consumer preferences, and that, in turn, the theory will also induce the evolution of new and arguably better rules. This development, however, is not a matter of course. Just like markets for goods and services, markets for laws can fail and lead to laws that prove beneficial only for some members of society and not for society at large. The reasons for the development of what is at times termed a ‘race to the bottom’ are again manifold. First, legal rules result from political processes that may be influenced and shaped by interest groups. It follows that there is a risk that interest groups skew state actions in a direction that proves beneficial for interest group members, but not necessarily for others. In addition, states might actively try to cater to the interests of some members of society only at the expense of others. This may be the case if only some parties can influence the choice of the applicable law, even though the choice also affects others. Take, for example, choice-of-law clauses such as those in →consumer contracts that are negotiated by parties with unequal bargaining power. Since it is usually the professional and not the consumer who chooses the applicable law, regulators have to enact laws that cater to the preferences of professionals if they wish to have their laws applied. Finally, path dependencies may effectively prevent regulatory competition from producing rules that are universally beneficial. This is because legal change never takes place without context, but rather takes place in a pre-existing legal environment shaped by previous legislative or judicatory decisions. It follows that path dependencies will render radical changes and new beginnings difficult and unlikely – even if they represent the best course of action. This also holds true because any legal change involves costs.
Against this background, the interesting question is what actually happens in practice. Does regulatory competition induce a proverbial race to the top or the bottom? Unfortunately, there is no clear-cut answer. Take corporate law, for example, where it has long been discussed whether regulatory competition is more likely to lead to better or worse corporate laws. In the race to the bottom scenario, states compete for corporate charters by biasing their substantive corporate laws towards managers, ie those parties who take, or at least strongly influence, the decision of where to incorporate (Lucian A Bebchuk, ‘Federalism and the Corporation: The Desirable Limits on State Competition in Corporate Law’ (1992) 105 Harv.L.Rev 1437; Lucian A Bebchuk and Allen Ferrell, ‘Federalism and Corporate Law: The Race to Protect Managers from Takeovers’ (1999) 99 Colum.L.Rev. 1168). By contrast, in the race to the top scenario, states focus on management incentives to maintain equity attractiveness and compete for corporate charters by making their substantive corporate laws more beneficial for both managers and shareholders (Roberta Romano, The Genius of American Corporate Law (Aei Press 1993); Roberta Romano, ‘Competition for Corporate Charters and the Lesson of Takeover Statutes’ (1993) 61 Fordham L.Rev. 843). Unfortunately, there is also no solid empirical evidence available indicating whether the race to the top or the race p. 1519to the bottom scenario prevails. Again, take corporate law, where so-called event studies show that the stock market price of a publicly held corporation increases following incorporation in Delaware (Michael Bradley and Cindy Schipani, ‘The Relevance of the Duty of Care Standard in Corporate Governance’ (1989) 75 Iowa L.Rev. 1; Peter Dodd and Richard Leftwich, ‘The Market for Corporate Charters: “Unhealthy Competition” versus Federal Regulation’ (1980) 53 JBL 259; Randall Heron and Wilbur Lewellen, ‘An Empirical Analysis of the Reincorporation Decision’ (1998) 33 J.Fin.Quant.A. 549; Allen Hyman, ‘The Delaware Controversy – The Legal Debate’ (1979) 4 J.Corp.L. 368; Jeffry Netter and Annette Poulsen, ‘State Corporation Laws and Shareholders: The Recent Experience’ (1989) 18 Fin.Man. 29). In addition, there are event studies indicating that a corporation’s value as measured by what is referred to as ‘Tobin’s Q’ increases upon incorporation in Delaware (Robert Daines, ‘Does Delaware Law Improve Firm Value?’ (2001) 62 J.Fin.Econ. 525). However, for various reasons, these studies do not allow the conclusion that regulatory competition in corporate law in the USA has induced a race to the top (Sanjai Bhagat and Roberta Romano, ‘Event Studies and the Law: Part II: Empirical Studies of Corporate Law’ (2002) 4 ALER 380 et seq; Guhan Subramanian, ‘The Disappearing Delaware Effect’ (2004) 20 J.L.Econ.& Org. 31).
Outside corporate law, notably in contract law, the picture is hardly better, in that here, too, there is no empirical evidence concerning the effects of regulatory competition. As regards contract law, such empirical evidence would also be difficult to find, as the quality of contract law depends on contracting party preferences. Since the parties decide whether a contract law is good or bad, it follows that the only way to determine whether regulatory competition leads to better or worse contract law is to analyse the effects of a contract law reform. If more parties decide to choose a certain contract law after it has been amended, it may safely be assumed that the reform – and thus regulatory competition – has had positive effects. Unfortunately, there are as yet no such empirical studies analysing the impact of recent contract law reforms, and such studies would also be difficult to conduct given the non-public nature of most contracts. However, there are good reasons to believe that regulatory competition in contract law, and arguably beyond, will instead induce a progressive improvement rather than deterioration in law. This is because a choice of the applicable contract law, at least as a matter of principle and in contrast to corporate law, only affects the immediate parties to the contract, ie the parties that actually agree on the choice of law. On condition that these parties’ choice is voluntary and informed, states have no incentive to skew their contract laws in favour of one party or the other, but rather have an incentive to accommodate the interests of all parties involved. It follows that regulatory competition in contract law, at least as a matter of principle, is more likely to induce a race to the top than a race to the bottom. This naturally does not rule out a race to the bottom in practice. In fact, there are cases that are more likely to trigger deterioration in law as opposed to its improvement. Choice-of-law clauses in →consumer contracts or, more generally, choice-of-law clauses negotiated by parties with unequal bargaining power have already been mentioned. In addition, there are choice-of-law clauses that affect third parties who have no say during the contract drafting process, such as in contracts for the benefit of third parties. In both cases, in their wish to have their contract laws applied, lawmakers may tend to enact laws catering solely to the preferences of those parties actually choosing the applicable law. Thus, lack of equal bargaining power and lack of participation in the drafting process may lead to one-sided laws that themselves may eventually induce a race to the bottom.
IV. Normative implications
The preceding considerations hold a number of implications for private international law. The most important is that regulatory competition should be promoted if and to the extent that it is more likely to induce progressively improved law, whereas it should be regulated, ie restricted, if and to the extent that it is more likely to do the opposite. In both cases, private international law plays a crucial role because it can help both to facilitate and to regulate regulatory competition. In addition, substantive law may become relevant.
1. The role of private international law
a) The race to the top scenario
In the race to the top scenario, private international law may help to promote regulatory competition first and foremost by allowing p. 1520parties to choose the applicable law. In current private international law regimes, freedom of choice, and thus the very foundation of regulatory competition, already enjoys widespread application. In fact, if there is one concept in private international law that has steadily extended its scope over the last few years, it is freedom of choice (→Choice of law). Such freedom takes two distinct forms – direct and indirect. It is direct if the parties may choose the applicable law via a choice-of-law clause, while it is indirect if the parties may influence facts that determine the applicable law. In corporate law, for example, many states follow the incorporation theory and apply the law of the state where the company was incorporated (→Companies). As a result, parties may indirectly choose the applicable corporate law by choosing the state of incorporation. For the most part, however, freedom of choice is granted directly, so that parties may choose the applicable law by agreement. Its classic, and until today the least contested, area of application of direct freedom of choice is contract law. Here, with the exception of some South American and Middle Eastern countries, it claims widespread application (Jürgen Basedow, ‘Theorie der Rechtswahl oder Parteiautonomie als Grundlage des Internationalen Privatrechts’ (2011) 75 RabelsZ 32; Giesela Rühl, Statut und Effizienz (Mohr Siebeck 2011)). In other fields, direct freedom of choice has recently gained recognition. This holds particularly true for the private international law of non-contractual obligations. Here, national legal orders and international instruments commonly provide that agreements on the applicable law are permissible after the event generating the non-contractual obligation has occurred. Article 14(1) →Rome II Regulation (Regulation (EC) No 864/2007 of the European Parliament and of the Council of 11 July 2007 on the law applicable to non-contractual obligations (Rome II),  OJ L 199/40), for example, allows parties to submit non-contractual obligations to the law of their choice by an agreement entered into subsequent to the event giving rise to the damage. In international family and →succession law, parties in many legal orders are now allowed to choose from a range of laws. According art 5(1) →Rome III Regulation (Council Regulation (EU) No 1259/2010 of 20 December 2010 implementing enhanced cooperation in the area of the law applicable to divorce and legal separation,  OJ L 343/10), for example, spouses may designate the law applicable to their divorce or legal separation provided that it is either the law of their common habitual residence, the law of their last common habitual residence, the law of the →nationality of either spouse or the law of the forum. By the same token, art 15 Maintenance Regulation (Council Regulation (EC) No 4/2009 of 18 December 2008 on jurisdiction, applicable law, recognition and enforcement of decisions and cooperation in matters relating to maintenance obligations,  OJ L 7/1) refers to art 8(1) of the Protocol to the new Hague Maintenance Convention 2007 (Hague Convention of 23 November 2007 on the international recovery of child support and other forms of family maintenance,  OJ L 192/51 and Hague Protocol of 23 November 2007 on the law applicable to maintenance obligations,  OJ L 331/19) that allows parties to submit their maintenance obligation to the law of either party’s nationality or habitual residence (→Maintenance obligations). Finally, art 22 Succession Regulation (Regulation (EU) No 650/2012 of the European Parliament and of the Council of 4 July 2012 on jurisdiction, applicable law, recognition and enforcement of decisions and acceptance and enforcement of authentic instruments in matters of succession and on the creation of a European Certificate of Succession,  OJ L 201/107; →Rome IV Regulation) allows the (future) deceased to choose the law applicable in respect of succession rights resulting from death. Against this background, it is fair to say that freedom of choice is deeply embedded in private international law. However, it should be noted that outside Europe, freedom of choice is for the most part granted by national law. Of course, this is not a problem as long as states actually allow the parties to choose the applicable law. However, it entails the risk that individual states unilaterally do away with freedom of choice and thereby undermine the market for laws. Ideally, freedom of choice should therefore not only be enshrined in national law, but also in international law.
In addition to allowing freedom of choice, private international law may also promote regulatory competition by removing unnecessary restrictions to freedom of choice. At the p. 1521moment, many national legal orders and international legal instruments restrict freedom of choice in a number of instances. According to art 3 Rome I Regulation (Regulation (EC) No 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations (Rome I),  OJ L 177/6; →Rome Convention and Rome I Regulation), for example, the parties may only choose the law of a state, but not a non-state body of law, while according to § 187(2)(a) Restatement (Second) of Conflict of Laws (American Law Institute, Restatement of the Law, Second: Conflict of Laws 2d, St Paul 1971; →Restatement (First and Second) of Conflict of Laws) and § 1-301(e)(1) of the UCC (Uniform Commercial Code, American Law Institute, Uniform Commercial Code, Official Text with Comments, St Paul 2012), a choice-of-law clause will be respected only if the parties or the contract have a relationship to the chosen law. All these restrictions unnecessarily limit regulatory competition by reducing the number of available contract laws. It has therefore been suggested that they be removed (Giesela Rühl, ‘The Choice of Law Framework for Efficient Regulatory Competition in Contract Law’ in Horst Eidenmüller (ed), Regulatory Competition in Contract Law and Dispute Resolution (CH Beck 2013) 287).
b) The race to the bottom scenario
In the race to the bottom scenario, private international law may help to regulate regulatory competition by restricting freedom of choice. If it manages to ensure that a choice of law mirrors the preferences of all parties involved in and affected by the choice, it may prevent states from enacting laws that cater to the preferences of some people at the expense of others. In current private international law regimes, such provisions are already commonplace. For example, many national and international private international law regimes restrict the parties’ choice if one of the parties is perceived as weaker than the other or if the choice affects the rights of third parties. According to art 6(2) Rome I Regulation, for example, a choice of law may not deprive consumers of the protection afforded to them by the mandatory provisions of the law of their habitual residence (→Consumer contracts) and according to art 3(2), 3rd sentence Rome I Regulation, a choice of law entered into after the conclusion of the contract may not adversely affect the rights of third parties. Both provisions ensure that a choice of law accounts for the interests of weaker parties, ie consumers and third parties not directly involved in the choice. Thus, lawmakers may not ignore these interests when enacting rules of substantive contract law. As a result, private international law may guarantee the proper functioning of regulatory competition, just as competition law guarantees the proper functioning of competition in markets for goods and services. However, the effectiveness of private international law to avoid a race to the bottom varies depending on whether regulatory competition is horizontal or vertical and depending on whether the choice-of-law rules are of national or supranational origin.
Private international law is the most effective in avoiding a progressive deterioration if regulatory competition is horizontal. This is because horizontal regulatory competition takes place between national contract laws and is brought about by a choice of law on the level of private international law. In contrast, private international law’s ability to avoid such a negative development is less obvious if regulatory competition is vertical. This is because vertical regulatory competition takes place between national contract laws and international or supranational contract laws, and is brought about by a choice of an optional instrument. However, the choice of an optional instrument may be subject to the rules of private international law, or alternatively the choice may be subject to the rules of the optional instrument itself. Take, for example, the original Draft for a Common European Sales Law (Proposal of 11 October 2011 for a Regulation of the European Parliament and of the European Council on a Common European Sales Law COM(2011) 635 final; →CESL). According to art 3, the Common European Sales Law may be chosen by the parties. However, according to art 8 CESL-D, this choice will be subject to the rules of the Common European Sales Law and not to the rules of private international law. Accordingly, the rules of private international law, notably the Rome I Regulation, will not be capable of regulating the resulting – vertical – regulatory competition between the Common European Sales Law and the contract laws of the Member States.
However, in addition, the effectiveness of private international law in avoiding a race to the bottom varies depending on who actually enacts the pertaining choice-of-law rules. Private international law is less influential in this regard if it p. 1522is of national origin, ie if choice-of-law rules are enacted by national regulators. This is because states, just like individuals, pursue their own interests, and these interests are not necessarily directed towards efficient regulatory competition. Just like competitors on markets for goods and services, states might rather have an interest in preventing or at least impeding regulatory competition. Accordingly, private international law may be more effective in avoiding a race to the bottom if it is not enacted by states, ie the competitors themselves, but rather by international or supranational institutions seeking to balance the state interests involved. Against this background, it is to be welcomed that the European legislature has recently adopted a number of Regulations which provide for uniform choice-of-law rules for contractual and non-contractual obligations, divorce and →succession law. In addition, the →Hague Conference on Private International Law has added substantially to a growing body of globally accepted choice-of-law rules, of which many, albeit not all, embrace the freedom of choice principle. Certainly this does not mean that private international law cannot contribute to efficient regulatory competition if it is enacted by individual states. Provided that private international law is disciplined, for example, by constitutional principles, it may help to avoid a race to the bottom even if it is of national origin. However, the likelihood that it will actually do so is significantly lower.
2. The role of substantive law
The above discussion has focused on the ability of private international law to promote and regulate private international law. However, it should not be ignored that in addition to private international law, substantive law may also contribute to promoting regulatory competition and ensure that it actually leads to better laws. As regards the promotion of regulatory competition, international and supranational lawmakers may, for example, offer additional (optional) substantive legal regimes and thereby increase the number of laws available for party choice. Within the EU, this course of action has already proved to be successful in many areas of law, notably corporate and IP law. In addition, the United Nations Convention on the International Sale of Goods (United Nations Convention of 11 April 1980 on Contracts for the International Sale of Goods, 1489 UNTS 3; →CISG), the Principles of European Contract Law (Lando and Beale, Principles of European Contract Law (Parts I and II, Kluwer Law International 1999) and the UNIDROIT Principles for International Commercial Contracts (→UNIDROIT) have influenced national and international legislation in the field of contract law and hence have stimulated regulatory competition. Should the Common European Sales Law (→CESL) ever be enacted, it might promote regulatory competition in the field of contract law. This competition naturally differs from the competition between national laws, in that it is not horizontal, but rather vertical. It takes place not between national laws, but between national laws on the one hand and international or supranational laws on the other, and inevitably for vertical regulatory competition to have positive effects, certain conditions need to be met. Most importantly, the optional instrument in question must be efficiently designed to avoid network effects leading to inefficiently low market standards (Horst Eidenmüller, ‘What Can Be Wrong with an Option? An Optional European Sales Law as a Regulatory Tool’ (2013) 50 CMLR 69). However, provided these conditions are met, optional instruments may be driving forces on the market for laws (Stefan Leible, ‘Kollisionsrecht und vertikaler Regulierungswettbewerb’ (2012) 76 RabelsZ 374).
As regards the regulation of regulatory competition, the harmonization of substantive laws may play a part in avoiding a race to the bottom. Just like optional legal regimes, harmonizing measures are usually adopted by international or supranational lawmakers. They require states to adjust their substantive laws to comply with minimum standards set by the international community, or in Europe by the EU. Provided that these minimum standards reflect the preferences of society at large, harmonization may effectively prevent states from enacting one-sided laws apt to induce a race to the bottom. However, the problem with regulating regulatory competition at the level of substantive law is that its reach is frequently limited. With EU Directives, for example, the effects of harmonization are confined to the laws of the Member States. It follows that a race to the bottom cannot be avoided if the laws of a non-Member State apply, for example, by way of a choice of law which by its nature does not necessarily account for the interests of weaker and third p. 1523parties. It follows that regulatory competition needs additional regulation on the level of private international law where the interests of weaker and third parties are at stake.
Regulatory competition is a powerful concept that improves our understanding of law and the lawmaking process. It explains how market forces may shape the existence and the content of legal rules and regulations. However, a number of questions still remain to be resolved and supported by empirical evidence. The most important challenge that yet remains is to define when and under what conditions regulatory competition will actually induce a race to the top or a race to the bottom. If we achieve clarity in this regard, private international law may be used to both promote and regulate regulatory competition – for the benefit of all parties involved and society at large.
William Bratton and Joseph McCahery, ‘The New Economics of Jurisdictional Competition: Devolutionary Federalism in a Second Best World’ (1997) 86 Geo.L.J. 201;
Horst Eidenmüller, ‘The Transnational Law Market, Regulatory Competition, and Transnational Corporations’ (2011) 18 Ind.J. Global L.Stud. 707;
Horst Eidenmüller (ed), Regulatory Competition in Contract Law and Dispute Resolution (CH Beck 2013);
Eva-Maria Kieninger, Wettbewerb der Privatrechtsordnungen im Europäischen Binnenmarkt (Mohr Siebeck 2002);
Larry Ribstein and Erin O’Hara, The Law Market (OUP 2008);
Wolf-Georg Ringe, ‘Corporate Mobility in the European Union – A Flash in the Pan? An Empirical Study on the Success of Law Making and Regulatory Competition’  ECFR 230;
Roberta Romano, The Genius of American Corporate Law (Aei Press 1993);
Giesela Rühl, Statut und Effizienz (Mohr Siebeck 2011);
Giesela Rühl, ‘Regulatory Competition in Contract Law: Empirical Evidence and Normative Implications’  9 ERCL 61;
Charles Tiebout, ‘A Pure Theory of Local Expenditure’ (1956) 64 J.Pol.Econ. 416;
Joel Trachtman, ‘Regulatory Competition and Regulatory Jurisdiction’ (2000) 3 J.Int’l Econ.L. 331;
Stefan Vogenauer, ‘Regulatory Competition through Choice of Contract Law and Choice of Forum in Europe: Theory and Evidence’ (2013) 21 ERPL 13.