More specifically states would establish

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More specifically, states would establish organizations where the transaction costs occasioned by allocation through the organization are less than those occasioned by allocation through ad hoc transactions, all other things being equal. High transaction costs of ad hoc transactions characterize circumstances in which it is difficult to make an initial allocation based on effects, combined with high transaction costs in the formal reallocation of prescriptive jurisdiction. Furthermore, where effects are dispersed, and “holdout” problems are likely in trying to negotiate a particular “transaction” in prescriptive jurisdiction, it may be useful to states to step behind a partial veil of ignorance by establishing an organization that has some measure of “transnational” power to address the relevant issue. By “transnational,” I mean that the organization’s decisions are not subject to the control of each individual member, but are subject to some shared governance. An historical example of this type of conduct is the agreement of the Single European Act in 1987, in which member states of the European Community decided to accept broader use of qualified majority voting. No state could predict the circumstances under which it would be in the minority (hence, the partial veil of ignorance), but each state (presumably) estimated that it would benefit on a net basis from this modification. Note that any assignment that differs from the status quo would have adverse distributive effects on the states ceding jurisdiction. Of course, where there is no net gain from transacting, we would expect states to refrain from transactions. Where there is a potential net gain, some type of compensation may be required in order to induce states to cede jurisdiction. These distributive consequences would implicate strategic concerns along the lines discussed below. b. Regulatory Competition and Regulatory Cartelization We have seen, in international taxation and in other contexts, the possibility that one state will attract market entrants, or the businesses in one state will find it efficient to export and will compete effectively against other states, because of lax regulation. Although there is still scholarly contention over empirical support for the pollution haven hypothesis, the theoretical basis for the hypothesis is unimpeachable. One of the factors that may make regulatory competition attractive—one of the assumptions in Tiebout’s model—is costless mobility. The internet provides something very close to costless mobility. And indeed, the Principality of Sealand, with hosting services administered by Havenco, is but one example of the possibility for states, or quasi-states, to position themselves at or near the bottom in terms of quantity of regulation.
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