Shirking and Sharking: A Legal Theory of the Firm

Abstract

This article reexamines economic theories of the firm from a legal perspective. Focusing on the importance of agency authority, it recommends a revision in economic theories of the firm which emphasize agency and transactions costs, contracts, property rights, and employment. A theory of the firm is advanced which encompasses various economic principles under a legal umbrella. From a legal perspective, this theory of the firm suggests a solution to a problem that economic theories have in defining the boundaries of firms. The structure of firms is described as involving both consumer markets for goods and services and organizational metamarkets. The costs of agents and principals, among other important factors, determine which firms survive over time. The article also recommends that a theory of the firm should include the costs of opportunism or sharking by principals or quasi-principals through the misuse of power and authority within firms, as well as the more commonly recognized agency costs of shirking. It concludes with examples of the implications of this analysis of the firm for the regulation of opportunism in the law of enterprise organization. In particular, it suggests that recognizing the costs of sharking as well as shirking supports judicial review of compliance with fiduciary duties in four different areas: oppression of minority shareholders, executive compensation, noncontractual harm to creditors, and financial reengineering of capital structure.

JEL Classification: D23, G38, K22