1 / 10

A Team Production Theory of Corporate Law

A Team Production Theory of Corporate Law. Margaret Blair & Lynn Stout - 1999. Principal-Agent Model. Explanation of public corporation ownership Shareholders (principal) own corporation and hire officers (agents) Goal of corporation is to increase shareholder wealth

cody
Download Presentation

A Team Production Theory of Corporate Law

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript


  1. A Team Production Theory ofCorporate Law Margaret Blair & Lynn Stout - 1999

  2. Principal-Agent Model • Explanation of public corporation ownership • Shareholders (principal) own corporation and hire officers (agents) • Goal of corporation is to increase shareholder wealth • Corporation law is used to reduce “agency costs” and maintain faithfulness of directors/officers (agents) to the principals • E. Fama, Agency Problems and the Theory of the Firm (1980) • Advocated the separation of ‘management’ and ‘risk bearing’ roles • Used insights provided by Alchian and Demsetz (1972) to establish agent and principal roles

  3. Production, Information Costs, and Economic Organization • Published in 1972 in AER • Armen A. Alchian (University of California, Los Angeles) • Harold Demsetz (University of California, Los Angeles) • What makes a team? • The use of several resource types • The product does not equal a sum of individual contributions • Not all resources used by the team belong to one person • Think about two people lifting a 100lb box • Does each person lift 50lbs? • Does one lift 75lb and the other 25lb?

  4. Production, Information Costs, and Economic Organization • Shirking: A problem with the a team • Fixed by using a “Monitor” • Residual claimant • Observe input behavior • Central party common to all contracts • Ability to alter team membership • Ability to sell these rights (ownership) • When does a team become a firm? • When it is possible to increase production through a team • When it is economical to estimate marginal productivity via observation

  5. A Team Production Theory ofCorporate Law • Blair and Stout (1999) refute application of Principal-Agent Model and corollary that corporations’ primary goal is to maximize shareholder wealth • Model applies to firms in general, but provides no special insights into public corporations • Team Production Approach • Where a productive activity requires the combined investment and coordinated effort of two or more individuals or groups • Issues occur in form of ex ante (agreement) shirking and ex post (agreement) opportunism

  6. A Team Production Theory ofCorporate Law • Issues occurring under Team Production Approach circumvented by corporate law as a “Mediating Hierarchy” • Formation of Public Corporation provides a hierarchy existing outside original production team • All team members “agree to give up control rights over the output from the enterprise and over their firm-specific inputs” (i.e. to a BoD) • No single team member is a “principal” having right of control • Solves three primary issues with Team Production Approach: • Convoluted information-gathering and decision-making • Shirking and opportunism via principal-agent contracts • Disputes between team members regarding allocation of duties and rewards

  7. A Team Production Theory ofCorporate Law • A public corporation is not simply a “bundle of assets” under common ownership, but rather a complex collection of agreements between team members working together for mutual gain: “A nexus of firm-specific investments.” • Control over assets and outputs are mutually given up in order to reduce shirking and rent-hoarding via implementation of an internal mediating hierarchy

  8. A Team Production Theory ofCorporate Law

  9. Keeping Directors Faithful • Influences of Corporate Law and Culture • Directors motived to do well if they want to maintain their positions • Directors also motivated by desire to maintain reputations • Corporate law limits ability of directors to serve their own interests • Directors unable to appropriate corporate assets beyond established compensation • Assumption exists that if directors cannot serve their own interests, they will serve the interests of their firm (Is this a valid assumption?) • Corporate culture motivates directors to serve as fair trustees of firm • Serves role of benevolent/trusted mediator implied in all contract theory

  10. Mediating Hierarchy Theory • May only be a “second-best” solution to relegation of asset and firm output control • Given certain constrains, a board of directors may offer substantial reduction in inefficiencies and rent loss • Mediating Hierarchy Theory expands on legal view of corporation as a “nexus of contracts” (explicit and implicit) • Highlights importance of team production dynamics within public firms • Establishes tools to understand political nature of a corporation • Explains role of BoD in determining firm focus on employees/shareholders

More Related