The Endogenous Optimization Mechanism of Investor Protection

Many empirical data shows that private firms often significantly enhance the law protection offered to investors, but public firms rarely do so. We construct a model that endogenizes the degree of investor protection and the filtering precision of law institute or some private contracts that insider provide. Using as a springboard the assumption that legal regimes differ in their ability to enforce precisely filtering contacts that protection only in those cases where expropriation can occur. Our model generates the optimal mechanism of all kinds of contracts in both public and private firms.