ABSTRACT
In 2023 The Economist noted that a ‘realistic theory of the firm was in prospect’ in the 1990s but lamented that ‘three decades on, it is no closer’. Indeed, prevailing contractual theories of the firm, inherited from Ronald Coase and others, are unable to account for what Bengt Holmström described as one of the most significant and robust empirical regularities to be explained by any theory of the firm, namely that firms typically own the assets used in production, and that firms, rather than their managers or shareholders, make contracts with customers or suppliers. This chapter argues that this shortfall is due to a failure to agree on what a firm is and the tendency to downplay the role of law in constituting the firm. The approach known as legal institutionalism offers a way forward. By making the case for the inclusion of the concept of legal personality in the theory of the firm, we propose a workable definition of the firm that helps to resolve some thorny questions concerning its nature and boundaries.
Gindis, David and Hodgson, Geoffrey M, The Legal Nature of the Firm (December 19, 2024) in Josef Windsperger and Aveed Raha (eds), Research Handbook on the Theory of the Firm (Cheltenham: Edward Elgar).
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