Enterprise Organization
Prof. Howson, Fall 2007
I. Introduction
1) Do we regulate it economically (firm vs. mkt) or as a nexus of Ks?
(a)Goal: to protect reasonable expectations of those who participate in the firm
(b)Sole proprietorship: Management by owner; reaps all of the profits/bears all responsibility
(c) Business association: Split management duties/rights; Profits/risks split b/w owners
(d)Giving up sole proprietorship rights for a bus. ass. = Pooling resources creates greater benefits.
(e)That’s what this class is: the moment you transition from sole proprietorship and to creating your own business association and the questions in governing those relationships
2) Transaction cost factors (p.6)
(a)Bounded rationality – don’t have perfect knowledge of all variables.
(b)Opportunism – Notion of transparency & disclosure
(i) You can certainly act in your own interests, but there will be situations where you not only act in your own interest, but you hurt your business partners.
3) The role of lawyers
(a)Look at the situation from the front end: how do you address threats/risks/costs?
(i) Strategies:
o Ex-ante = private – K-ing beforehand
o Ex-post = judicial ordering by a court after problem arises
(ii)Role of lawyer =Decision: more efficient to provide remedies ex-ante or to have ex-post liti.?
4) Discrete and relational K-ing
(a)Discrete: shorter term, will deal with a particular situation; usually fewer parties
(b)Relational: expects relations b/c parties to continue overtime. Want more flexibility for renegotiation. Can not address all specifics, but does set up all mechanisms for future problems. Longer duration, more interaction
5) Rule Types
(a)Default rules = provided originally, will remain that way unless parties opt out
(b)Immutable rules = must follow the state-given rule, can’t be ‘trumped’ by private ordering
(c) Penalty default = forces party to come into ex ante agreement through default rules that might be unattractive
(d)Tailored = given K’ing parties the exact rule that they would themselves chose if they were able to bargain costlessly
(e)Majoritarian = the result that most similarly situated parties would prefer
II. Agency
· Owner (principal) performs/oversees Ownership, Directorship, Management
· Agency Law= outside of statutes and Ks: counters opportunism
· Agency Requirement: manifestation of consent by principal for agent to act on his behalf & acceptance by agent.
A. Fiduciary Limits on Agent’s Right of Action_________________________________________
1. Agent is a fiduciary with respect to matters within the scope of his agency
2. Must act solely for the benefit of principal unless otherwise agreed
3. Must deal w/him/her in total candor
4. Must acct to her for all profits flowing from i
eceives loan from supplier & leases out place for new company. THEN he leaves family business w/out giving notice. In following days he hires some employees & begins actively soliciting Ace customers.
H: No violation; Fiduciary duty= during principal-agent relationship only
· Agent can make logistical arrangements (lease, supplies) for a new employment before leaving current.
· Can use your general knowledge, experience, memory and skills (including ‘remembered information’) in establishing new business after leaving old employer
· Customer lists not trade secrets if info publicly available.
Employers could’ve avoided problems by making an ex-ante k provision/mechanism
Ex: post termination non-competition k
Distinguishing Reilley & Hamburger
K status:
R = employment K (still has duty not to compete)
H= at will employee; no k
· Competition:
o R=openly recruiting customers
o H= just setting up shell – didn’t solicit customers until after departure
· Transparency in dealing with employer:
o R= none
o H= revealed plans & left company before recruiting new customers.
