Law and Economics Midterm Study Guide

Law and Economics Midterm Study Guide - Law and Economics...

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Law and Economics Midterm Study Guide Types of Organizations Partnerships (multiple owners)/Propiertorships (One owner) a. No Distinct Legal Persona/ not incorporated No Limited Liability b. Commitment to firm is a commitment by its owners c. Partnership sales aren’t transferable d. Each individual partner has the right to liquidate the partnership Advantages in: i. Service professions: accounting, law, and investment banking ii. Lower cost of contracting: workers are skill based iii. Costs of Ownership: sharing income through worker ownership reduces risk for workers, workers are homogenous and share the same interests iv. Owners keep all the profit so owners will work harder Problems: Shriking because partners share their earnings, hire too few workers in order to keep salaries high, too capital intensive ( inefficiently small), wealthy partners are reluctant to engage with less wealthy partners due to liability so they will join a corporation Tax Considerations: Can deduct losses against other earnings so start-ups have incentive to be partnerships Co-Operatives a. Shares are in proportion to patronage/ how much each person sells to the cooperative b. Examples: REI, Ocean Spray, Dairy Co-Ops, Visa Advantages In: i. Electric Power Utilities, Mutual Insurance ii. When co-ops are wholesalers owned by their patrons iii. When they can cut out the middle man, whom charge high mark ups economies of scales in advertising iv. Reduces asymmetric information
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v. When patrons have similar interests low cost of decision making Problems In: Raising Capital b/c its difficult for them to determine how to divide, they can’t sell many different products that are purchased only rarely, Tax Considerations: Worker-Owned Firms a. Owned by the workers b. Examples: Avis Car Rental, Plywood Co-Ops Non-Profit Corporations a. Corporations can not pay out their profits no owners/ shareholders b. Board is self-perpetuating c. Can make a profit, but not distribute it d. Examples: Harvard’s Endowment, Red Cross Advantage: i. When quality is important and patrons cant observe the firm’s actions- asymmetric information problems are severe ii. Output/service is difficult for buyers to evaluate and is important consumers believe they spend more on output and on quality iii. Examples: Hospitals, Schools, Universities, Day Cares, Insurance, Relief efforts Disadvantage: Raising Capital because lenders don’t want to waste money on higher production costs, lenders cant take over ownership depend on contributions Tax Considerations: their capital is exempt from the property tax, donations are tax-deductable, making capital cheaper to non-profits than for profits Corporations
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o Separate Legal Persona : firms have a separate legal identity than that of its owners and managers limited liability Firms have less collateral than partnerships Asset partitioning : corps assets provide security for corp’s own debts, making the corp more stable and creditworthy
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Law and Economics Midterm Study Guide - Law and Economics...

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