Rights and Production Functions: An Application to Labor Managed Firms and Codetermination

55 Pages Posted: 11 Oct 2000 Last revised: 17 Jan 2011

See all articles by Michael C. Jensen

Michael C. Jensen

Harvard Business School; SSRN; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI); Harvard University - Accounting & Control Unit

William H. Meckling

Simon School, University of Rochester (Deceased)

Date Written: June 30, 2000

Abstract

It is traditional in the theory of the firm to define the production opportunity set available to the firm in terms of its boundary the maximum attainable set of output quantities for various input quantities, given the state of technology and knowledge. This boundary is the production function of the firm. One of our purposes here is to point out the dependence of such production functions on the structure of property rights and contracting rights within which the firm exists. We redefine the production function in order to recognize the dependence of output on the structure of property and contracting rights. That expanded framework is then used to discuss a concrete set of problems surrounding the role of labor in the firm ranging from the labor-managed firm system (in which tradable capital value residual claims [common stock] are legally prohibited), and the codetermination and industrial democracy movements (in which management participation by labor is required by law), to cooperatives and professional partnerships (i.e., quasi-labor-managed firms which arise out of the voluntary contracting process), and the capitalist corporation.

Keywords: Labor Managed Firm, Property Rights, Contract Rights and Production Functions, Rules of the Game, Nexus of Contracts, Codetermination, Industrial Democracy, Cooperatives and Professional Partnerships

Suggested Citation

Jensen, Michael C. and Meckling, William H., Rights and Production Functions: An Application to Labor Managed Firms and Codetermination (June 30, 2000). A THEORY OF THE FIRM: GOVERNANCE, RESIDUAL CLAIMS AND ORGANIZATIONAL FORMS, Harvard University Press, December 2000; Harvard Business School NOM Unit Working Paper No. 2000. Available at SSRN: https://ssrn.com/abstract=173460 or http://dx.doi.org/10.2139/ssrn.173460

Michael C. Jensen (Contact Author)

Harvard Business School ( email )

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Harvard University - Accounting & Control Unit ( email )

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William H. Meckling

Simon School, University of Rochester (Deceased)

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