Corporations-Miller-Sp06

Corporations-Miller-Sp06 - Corporations Spring 2006 I Intro...

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Corporations: Spring 2006 I. Intro: What is a Firm A. Firms vs. contracts as ways of organizing businesses B. Coase’s Theorem assumes no transaction costs but w/out them the assignment of legal rts w/n affect socially efficient outcome. Will just bargain for optimal distribution and most efficient K. So gives us a lens to look at real world and ask impt question: what about transaction costs? C. Why do business ppl sometimes choose contract and not a firm? a. Coase: purchase of a firm or contract will occur when easier and cheaper to do so b. Advantages of a Firm i. Both parties will get info when buy firm so low transaction costs and can minimize other costs. ii. Legal advantages: lower taxes or limited liability iii. Minimizes opportunism c. Distinction b/w firms and K is probably overstated b/c contracts can be structured to look like firms and firms can be understood as complex networks of contracts i. Relational contracts: contract b/w 2 parties w/ intent to have LT business relationship and many terms of K are left undefined or subject to negotiation. Similar to firms b/c closer connection b/w 2 parties ii. Firms: can be viewed as a bureaucracy or a creature of contracts. These contracts are unusual in 2 ways: 1. (1) very vague/open ended K: Ex: Corp officers have a fiduciary duty which is an implied K 2. (2) interconnected: company’s K w/ CEO is related w/ its K w/ its bd of directors; firm as a network of contracts D. Structure of a Firm a. Firm operates in complex social/legal environment b. Has customers, suppliers, employees, managers, shareholders, creditors (supply capital), and gov’t . But corp law is limited in its application to these factors. c. Corp law primarily deals w / managers, shareholders, and the gov’t. Gov’t and cts as supervisors of this relationship. E. 3 Perspectives on the Firm (mostly small ones but talk usually about big firms) a. (1) Berle-Means : late 1930s and very vibrant today: i. Separation of ownership and control : Owned by shareholders and run by professional managers who d/n own company. ii. Effect: principle problem of corp law. Led to abuse: managers were managing other ppl’s $ for their own benefit (Ken Lay, Kozlowksi) iii. Solutions: increase regulation b. (2) Law and Economics: recognizes that Berle-Means was right but differs b/c: i. Self-interested behavior by managers is referred to as “agency costs which has diff normative connotations: not as condemned ii. Solution: control by mkt mechanisms . If manager steals, then w/n run a good company and mkt will sanction the manager and the company. iii. Going to be residual agency costs . C/n squeeze all costs out of the system b/c all employees shirk or are lazy at some point. Want to squeeze agency costs to point where cost of squeezing the costs=the cost squeezed iv. Gov’t plays a more limited role . Agency costs of management are controlled by principles like fiduciary duties enforced by cts.
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