Organizations such as corporations and other business entities play an enormous role in modern economies and are major political and social actors. Moreover, numerous policy and legal questions in corporate and securities law, antitrust, regulation, international trade, and finance depend on our understanding of why business activity is generally organized in firms, and what economic and social function firms serve. Is a corporation simply a legal fiction, a "nexus of contracts," as some economists have suggested? Or is the nature and process of productive activity different when it is carried out within a firm rather than across markets in such a way that has implications for the law and policy? How does the law identify which legal rules apply in which situations? Do firms have a social function or social responsibilities that are more than, or different from, the sum of the responsibilities of the individuals who participate in the firms? And why do the "boundaries" between within-firm activities and across-firm activities shift, as happens when firms "outsource" production? This seminar course will begin by examining the classics in the literature on the economic theory of the firm, beginning with works by Coase, Alchian & Demsetz (team production theory), Jensen & Meckling (principal-agent theory), Easterbrook & Fischel (nexus of contracts theory), Williamson (transactions cost theory), and Oliver Hart (property rights theory). Then we will read and evaluate more recent literature, such as the work of Hansmann & Kraakman (elaborating a property rights theory of the law of entities), Rajan & Zingales and Blair & Stout (developing a team production theory of corporate law), Antras, Antras & Helpman (on outsourcing in international trade), Baker, Gibbons & Murphy (relational contracts), and Baldwin & Clark (on the role of modularization). We will also look at the concept of the corporation as "legal person," and the implications of the recent Supreme Court opinion that says corporations have First Amendment rights. Enrollment limited.
Prerequisite: Corporations and Business Entities or Corporations.