Coase, Knight, and the Nexus-of-Contracts Theory of the Firm : A Reflection on Reification, Reality, and the Corporation as Entrepreneur Surrogate

Scholars routinely credit R.H Coase and his first seminal work — The Nature of the Firm — as the progenitor of the nexus-of-contracts theory of the corporation. This account, which has dominated legal scholarship for four decades, describes a corporation as a nexus of contracts between the various claimants to the earnings of the business — shareholders, directors, officers, employees, customers, suppliers and other factors of production. In this article I argue for a different understanding of Coase’s theory of the firm and its implications for legal research into the nature of the modern corporation. I argue that nexus-of-contracts scholar’s claims to Coase’s lineage are based on a misapplication of Coase’s central insights and the pursuit of a very different research project than underlay The Nature of the Firm. I suggest that Coase’s insights must be understood as an extension of Frank Knight’s grand opus — Risk, Uncertainty and Profit — and as an extension of Knight’s theory of the entrepreneur. So understood, Coase’s theory of the firm, properly understood, supports a very different contractarian account of the corporation than the currently dominant nexus-of-contracts version, and a very different research agenda. Properly interpreted, the firm has boundaries and a center. Properly understood, the corporation and the firm are different phenomenon. Properly understood, the corporation and corporation law must be seen as serving the purpose of providing the corporation with a substitute for the entrepreneur who owns and directs the classic firm