BusOrgzOutline - Business Organizations Fall 2007 Outline...

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Business Organizations Fall 2007 Outline I. Introduction a. Basic Concepts and Terms i. Differentiating between the market and firm 1. The firm is the antithesis of the market a. Market – each producer/consumer works in own self-interest based on market signals b. Firm – resources are allocated pursuant to orders from employer to employees 2. Firm Defined: A set of relations that arise when resources are allocated by the entrepreneur via commands to her employees, rather than the set of relations that arise when an entrepreneur allocates resources via contract with outsiders. a. Con: supply/demand issues b. Pro: Market is flexible; no long term deals; no long term obligations to worry about ii. The firm as a nexus of contracts 1. Alternative Definition of Firm: Nexus of contracts b/w various claimants to a share of the gross profits generated by the business a. Includes contractual relations with employers, customers, suppliers, lenders, independent contractors, etc. b. Con: Locked in to an agreement that might not be flexible in long-term; things like ingredients/labor/energy could increase in cost c. Pro: Provides certainty; obligations are laid out iii. Sole Proprietorship – one owner; sole person has authority to make and carry out business policies iv. Business Association – more than one owner; functions of classic owner/entrepreneur are divided 1. ex. partnership, corporation, or LLC b. Organizing the Firm: Selecting a Value-Maximizing Governance Structure i. Business Planning: The Role of a Corporate Lawyer in Organizing the Firm 1. Corporate Lawyer is a planner transaction-cost engineer; understand governance role of markets/intra-firm cultures 2. Owners and managers of firms have a strong, usually rational preference for private ordering over court ordering. ii. Goal of Informed Rational Choice Between Competing Investment Options 1. Every participant has a store of human capital – a set of skills or an ability to render services. 2. Some have money capital – cash, cash equivalents, or other investment property that can be valued in terms of money 3. Rational investors have to consider: a. Comparitive perspective – weighing of plausible alternatives b. Ex Ante perspective – goal is to predict which investment strategy will yield the optimal result 4. Risk and Return – More diversified portfolio, the less the possible disparity between actual and expected total returns a. Different types of risk profiles: risk averse, risk neutral, risk preferring iii. Transaction Costs and Choice of Organizational Form 1. Two Expectations when forming a business association: a. All will use best efforts to make the venture successful
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b. Profits will be divided according to relative contributions 2. Transactional Cost Factors a. Bounded Rationality – there are inherent cognitive limits on ability to act rationally simply too many variables limits accuracy of judgment b. Opportunism - assumption that individuals pursue their own self interest
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This note was uploaded on 04/03/2008 for the course LAW 000 taught by Professor Ohare during the Fall '07 term at Villanova.

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BusOrgzOutline - Business Organizations Fall 2007 Outline...

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