Coase, Knight, and the Nexus-Of-Contracts Theory of the Firm: a Reflection on Reification, Reality, and the Corporation As Entrepreneur Surrogate
Coase, Knight, and the Nexus-of-Contracts Theory of the Firm: A Reflection on Reification, Reality, and the Corporation as Entrepreneur Surrogate Charles R. T. O’Kelley* I. INTRODUCTION Scholars routinely credit R. H. Coase and his first seminal work— The Nature of the Firm1—as the progenitor of the nexus-of-contracts the- ory of the corporation.2 This account, which has dominated legal scholar- ship for four decades, describes a corporation as a nexus of contracts be- tween the various claimants to the earnings of the business— shareholders, directors, officers, employees, customers, suppliers, and other factors of production.3 In this Article, I will argue for a different * Professor and Director, Adolf A. Berle, Jr. Center on Corporations, Law & Society, Seattle Uni- versity School of Law; Martin E. Kilpatrick Chair Emeritus, University of Georgia School of Law. 1. R. H. Coase, The Nature of the Firm, 4 ECONOMICA 386 (1937). 2. See, e.g., Stephen Bainbridge, The Board of Directors as Nexus of Contracts, 88 IOWA L. REV. 1, 9 (2002) (“The dominant model of the corporation in legal scholarship is the so-called nexus of contracts theory. This model’s origins fairly can be traced to Nobel Prize laureate Ronald Coase’s justly famous article, The Nature of the Firm.”); see also Angus Corbett & Peta Spender, Corporate Constitutionalism, 31 SYDNEY L. REV. 147 (2009) (“Since the rediscovery of the Coase Theorem by Jensen and Meckling in the late 1970s, corporate law theory has been dominated by economic analy- sis which posits that the corporation is a nexus of contracts.”); David Millon, Theories of the Corpo- ration, 1990 DUKE L.J.
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