The Structure of Ownership and the Theory of the Firm

Posted: 17 Nov 2009

See all articles by Harold Demsetz

Harold Demsetz

University of California, Los Angeles (UCLA) - Department of Economics

Date Written: 1983

Abstract

Provides a model that explains forms of business organizations in terms of ownership structure, on-the-job consumption preferences, and monitoring costs. The thesis of Berle and Means that the separation of ownership and control, or specialized ownership, which characterizes the modern corporation impairs the ability of the profit motive to encourage the most efficient use of resources is critiqued. The idealized owner-managed firm in economic theory operates as a profit-maximizing entity; nevertheless, this idealization rarely holds true for firms generally, even owner-managed ones. Real world businesses often permit on-the-job consumption by managers and employees. In competitive markets, this permitted consumption is traded for reduced monetary compensation. Because on-the-job consumption will take place only when off-the-job consumption would cost more, on-the-job consumption may not represent the dissipation of resources that critics of specialized ownership have contended. The problem of shirking is then taken up and it is shown that specialized ownership puts pressure on non-owner managers to reduce on-the-job consumption to levels even lower than in owner-managed firms. Value-maximizing ownership structure depends on ease of monitoring, desired scale of operations, and the managerial abilities of the potential firm owners. Finally, empirical data is presented against the alleged vacuum in control by owners and it is shown that due to management shareholdings, stock-based managerial income, and sizeable minority shareholdings in modern corporations, a strong linkage continues to exist between management and owner interests. (CAR)

Keywords: Shareholders, Employee management, Firm control, Operator ownership, Consumption, Managers, Economic theory, Firm ownership, Organizational structures

Suggested Citation

Demsetz, Harold, The Structure of Ownership and the Theory of the Firm (1983). University of Illinois at Urbana-Champaign's Academy for Entrepreneurial Leadership Historical Research Reference in Entrepreneurship, Available at SSRN: https://ssrn.com/abstract=1506347

Harold Demsetz (Contact Author)

University of California, Los Angeles (UCLA) - Department of Economics ( email )

Box 951477
Los Angeles, CA 90095-1477
United States
(310) 825-3651 (Phone)

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