Organizations and Markets

Spulber’s Separation Theory of the Firm

16 December 2008 at 12:42 am Peter G. Klein Leave a comment

| Peter Klein |

Dan Spulber’s new paper, “Discovering the Role of the Firm: The Separation Criterion and Corporate Law,” defines the firm “as a transaction institution [in which] the consumption objectives of the institution’s owners can be separated from the objectives of the institution itself.” 

The separation criterion provides a bright line distinction between firms and other types of transaction institutions. Firms under this criterion include profit-maximizing sole proprietorships, corporations, and limited-liability partnerships. Institutions that are not classified as firms include contracts, clubs, workers’ cooperatives, buyers’ cooperatives, merchants associations, basic partnerships, government enterprises, and government sponsored enterprises. The separation theory of the firm yields insights into corporate law that extend and complement the standard contractarian approach. The separation theory of the firm places emphasis on shareholder property rights and corporate governance.

The separation approach, Spulber argues, suggests that the corporate governance literature may pay too much attention to agency costs while downplaying the benefits of delegation. The paper builds on Spulber’s earlier work on intermediation and develops themes in his forthcoming book on the firm. Worth a look.

Entry filed under: - Klein -, Corporate Governance, Theory of the Firm.