Firms, Organizations and Contracts: A Reader in Industrial Organization

By Peter J. Buckley; Jonathan Michie | Go to book overview
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7. Conclusions

The publicly held business corporation is an awesome social invention. Millions of individuals voluntarily entrust billions of dollars, francs, pesos, etc., of personal wealth to the care of managers on the basis of a complex set of contracting relationships which delineate the rights of the parties involved. The growth in the use of the corporate form as well as the growth in market value of established corporations suggests that at least, up to the present, creditors and investors have by and large not been disappointed with the results, despite the agency costs inherent in the corporate form.

Agency costs are as real as any other costs. The level of agency cost depends among other things on statutory and common law and human ingenuity in devising contracts. Both the law and the sophistication of contracts relevant to the modern corporation are the products of a historical process in which there were strong incentives for individuals to minimize agency costs. Moreover, there were alternative organizational forms available, and opportunities to invent new ones. Whatever its shortcomings, the corporation has thus far survived the market test against potential alternatives.


Notes
1.
We do not use the term 'capital structure' because that term usually denotes the relative quantities of bonds, equity, warrants, trade credit, etc., which represent the liabilities of a firm. Our theory implies there is another important dimension to this problem--namely the relative amounts of ownership claims held by insiders (management) and outsiders (investors with no direct role in the management of the firm).
2.
Reviews of this literature are given by Peterson ( 1965), Alchian ( 1965, 1968), Machlup ( 1967), Shubik ( 1970), Cyert and Hedrick ( 1972), Branch ( 1973), Preston ( 1975).
3.
See Williamson ( 1964, 1970, 1975), Marris ( 1964), Baumol ( 1959), Penrose ( 1958), and Cyert and March ( 1963). Thorough reviews of these and other contributions are given by Machlup ( 1961) and Alchian ( 1965).

Simon ( 1955) developed a model of human choice incorporating information (search) and computational costs which also has important implications for the behavior of managers. Unfortunately, Simon's work has often been misinterpreted as a denial of maximizing behavior, and misused, especially in the marketing and

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