Connected Contracts

Abstract

This Article proposes the metaphor "connected contracts" for understanding collaborative economic activity. Connected contracts refers to the interrelating agreements and relationships among the participants in a business venture. From the perspective offered by this metaphor, there are no firms, no predetermined hierarchies, no organizations with personalities of their own, and no a priori notions of ownership or control; there is no shareholder or managerial primacy and no centralizing "nexus." The view is from the bottom up rather than from the top down. Boundaries and governance are neither central issues, nor do they loom in the background. There are no boundaries and there is nothing to govern. The connected contracts perspective is applied to an important aspect of joint activity?the putative bargain over control. Looking at business activity as bargains among individuals who agree to undertake a specific project leads to the insight that control of the venture is not automatically allocated to equity. The concept of an "owner" has little value. The connected contracts perspective suggests, among other things, that, all else equal, different capital structures can be viewed as representing different bargains over control. Capital structure is not irrelevant, but reflects unique bargains over control in general and future decisions about projects in particular. The inquiry then broadens to encompass more participants and types of contributions and to speculate on how the connected contracts metaphor might affect thinking about a variety of topics in corporate and tax law, including piercing the corporate veil, insider trading, executive compensation, the taxation of corporations, and the differential taxation of debt and equity. Finally, and tentatively, the essay offers a list of criteria that might be used to judge the value of models and metaphors and, by offering the list, suggests that scholars should be more conscious of the risks and rewards of reliance on models and metaphors.

JEL Classification: K22, G32