Firm Ownership and Organizational Form

In contemporary market economies, firms typically adopt one or another of a small number of standard organizational forms, both in terms of ownership and in terms of commitments to contractual counterparties. This review essay, prepared as a chapter for the forthcoming Handbook of Organizational Economics, explores the basic elements of those forms and the economic forces that shape them. It begins by focusing on the firm as a contracting entity, and on the relationship between the two different boundaries of the firm: the control boundary and the asset boundary. It then turns to the ownership of the firm, viewing the choice of the ownership class as a tradeoff between costs of market contracting and costs of ownership. The essay addresses in these terms not just investor-owned firms but also the variety of other ownership types found in modern market economics, including nonprofit and governmental enterprise, and focuses particularly on recent efforts to explain the evolution of employee ownership in the service professions, such as investment banking, advertising, and law. The essay concludes with a brief discussion of the role of law in enterprise organization, and a look to the future