Missing Persons in the Theory of the Firm: Why Legal Personality Matters

Accounting

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Abstract

The contractual theory of the firm, developed by Ronald Coase (1937), Oliver Williamson (1975, 1985a) and others, posits the firm as an efficiency-enhancing nexus of contracts where several input owners make bilateral contracts with a central agent – an individual or group entrepreneur. The focus is on contracts within the sphere of production, to the neglect of the legal personality of the firm. This makes it difficult to come to terms with the facts that firms typically own the assets used in production, and that firms, rather than their employees or owners, make contracts with customers or suppliers. The reinstatement of the concept of legal personality in the theory of the firm is necessary to account for these real-world facts. The efficiency-enhancing central contractual agent is the separate legal person in which ownership rights over assets used in production are vested, in whose name contracts are made, and thanks to which firms have access to courts. It is this singular legal personality that makes the firm an integrated whole, with the unitary capacity to enter into contracts with others, and to sue and be sued. The paper calls for a view of the firm that recognizes in law’s provision of legal-entity status a fundamental institutional support for the firm.