Abstract:
We seek to expand on current theories of the firm by focusing on the insufficiently explored question of why firms are so commonly organized as legal entities that are formally distinct from their owners. We develop the idea that a legal entity permits an entrepreneur to create a firm as a bundle of contracts that can be transferred to someone else, but only if they are transferred together. This bundled assignability allows for a balancing of several potentially conflicting interests. First, the entrepreneur who assembles the contracts wants liquidity -that is, the ability to transfer the contracts and cash out her interest in them. Second, the counterparties to the firm's contracts - the firm's employees, suppliers, creditors, and customers- want protection from opportunistic transfers that will reduce the value of the performance they've been promised. And third, the entrepreneur wants long-term commitments from the firm's counterparties to prevent holdup of her noncontractible investments in the bundle. By providingthat transfers of equity interests in the entity will generally not be considered assignments of the firm's contracts, organizational law provides a flexible tool that permits easy modulation of the tradeoff among these interests. An appreciation of this role of legal entities not only refines our theories of the firm, but provides guidance in shaping legal doctrine concerning the effects of various types of control transactions on a firm's contractual rights and obligations.

This seminar takes place at the Tinbergen Institute, room 4.08.