Team Production Theory and Corporate Law

Abstract

Corporations can be understood as solutions to team production problems, rather than as property. Incorporation involves creation of a new legal entity in which control rights are separated from residual claim rights. The corporation itself, not the shareholders nor any other corporate participants, becomes the owner of assets used in production, and of output. Decision-making authority is vested in an organizational hierarchy, headed by a board of directors that is legally independent of shareholders. Understanding corporations in this way helps explain a number of features of corporate law and provides new insights into the theory of the firm.

JEL Classification: D23, G34, K22, L22