Nexus of contracts and organizational forms

How firms are organized effects the value of the firm. Agency costs and misaligned incentives can destroy much wealth.

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    Nexus of Contracts

    The nexus of contracts model is the idea that a firm is made up of many different stakeholders. This in the introduction to this topic. BTW I use the Nexus of Contracts in so many ways in classes that it has almost become a joke with my students. We mention it almost every day in class. I really think it is that important.

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    Nexus of contracts - Wikipedia, the free encyclopedia

    The nexus of contracts theory is an idea put forth by a number of economists and legal commentators (most notable Frank Easterbrook of the United States Court of Appeals for the Seventh Circuit) which asserts that corporations are nothing more than a collection of contracts between different parties - primarily shareholders, directors, employees, suppliers, and customers.

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    Not all are in agreement as to the validity of all aspects of the nexus of contracts. For instance here is a good article laying out the limits of the nexus. I agree, but to that impose my reminder that it is a model, and as such does help in our understanding. Here is an important excerpt: "Shareholders care about the value of the residual claim on the corporation. Customers care about the quality and quantity of the goods produced by the corporation. Workers care about salary and conditions of employment. And so on. Under such conditions, efficient decisionmaking demands an authority-based governance structure in which information is channeled to a central decisionmaker empowered to make choices binding on the firm as a whole. In sum, under conditions of asset specificity, bounded rationality, and opportunism, the ability to adapt becomes the central problem of organization. In large public corporations, adaptation is effected by fiat. Obviously, fiat within firms has limits. Some choices are barred by contract, such as negative pledge covenants in bond indentures. Other choices may be barred by regulation or statute. Still other choices may be unattractive for business reasons, such as those with potentially adverse reputational consequences. Within such bounds, however, adaptation effected through fiat is the distinguishing characteristic of the firm."

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    Notes on Organizational forms

    Class notes on organizational forms

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    Types of Business Organisation put to music

    Ok, so the last few links have been a bit dry, this is a prezi presentation put to music on types of business organizations. It is only 3:37 and it will serve both as a nice break and a good review. It also has some on nationalized firms. Uploaded by Eve Anantasilp on 2012-11-15.

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    A Small Business Administration study on how firms decide their form

    A 2011 SBA study on how firms make their decision on Organizational Form by Rebel Cole. "This study makes seminal contributions to the literature on entrepreneurship: (i) by providing the first empirical evidence on a firm’s initial choice of LFO at start-up; (ii) by providing the first rigorous empirical evidence on the determinants of a firm’s initial choice of LFO; (iii) by providing the first empirical evidence on the incidence of changes in LFO during the start-years of a new firm; (iv) by providing the first empirical evidence on the determinant of changes in LFO during the start-up years of a new firm; and (v) by providing new evidence on differences in growth across organizational forms."

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    Quiz on the nexus of contracts

    Here is a quiz for my students. I am not sure if you have to be registered to take it or not, so will include it in the tools set. Will have one for organizational forms as well.

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