Theory of the Firm : Governance, Residual Claims and Organizational Forms (Preface and Introduction)

This book contains eight articles written (six with co-authors who are noted at the beginning of the relevant chapters) over the past 30 years addressing various aspects of the Theory of the Firm. These articles emanated from our desire to understand more thoroughly the forces pushing firms to operate efficiently and create value, thereby increasing human living standards. A thorough understanding of such forces will enable us to better engineer organizational and management practices and the legal and political rules of the game. To do this, we must understand the nature of the corporation in a very fundamental way. After all, the corporation is only one of many ways of organizing productive activities, and the existence of other organizational forms (such as partnerships, mutuals, and non-profits) indicates that it is not always the best way.The public corporation is the nexus for a complex set of voluntary contracts among customers, workers, managers, and the suppliers of materials, capital, and risk bearing. This means the parties contract not between themselves bilaterally, but unilaterally with the legal fiction called the corporation, thus greatly simplifying the contracting process. The rights of the interacting parties are determined by law, the corporation's charter, and the implicit and explicit contracts with each individual