Team Production Revisited

William W. Bratton is Nicholas F. Gallicchio Professor of Law Emeritus at the University of Pennsylvania Carey Law School. This post is based on his recent paper, forthcoming in the Vanderbilt Law Review.

My article, Team Production Revisited, forthcoming in the Vanderbilt Law Review, reviews and reconsiders Margaret Blair and Lynn Stout’s team production model of corporate law (TPM), offering a favorable evaluation.

With the TPM, Blair and Stout set themselves the task of articulating a model of the public corporation that does three things simultaneously. First, the model must be grounded in a microeconomic theory of the firm. Second, the model must be consonant with the provisions and structure of corporate law. Third, the model must situate the accomplishment of productivity outside of the tent of shareholder primacy and market control. Blair and Stout succeeded at the task described, achieving closure for their theory. Indeed, they did something that no one thought could be done.

The model first appeared in the Virginia Law Review in 1999, just as shareholder primacy emerged as corporate law’s consensus view. The TPM challenged the consensus and the agency model on which it centered by widening the descriptive lens. Where the agency model looks only at the shareholder-management contract, the TPM looks at the contracts between the corporation and all capital providers, both financial and human. Where agency model looks for value enhancement only through agency cost reduction, the TPM looks to the production side to encourage firm-specific investment. The TPM also deemphasizes market control, reviving the Coasian stress on hierarchical relationships independent of markets.

The TPM accomplishes a great deal and retains descriptive robustness, despite the substantial accretion of shareholder power during the two decades since its appearance. The TPM explains both the legal corporate entity and corporate governance institutions in microeconomic terms as the means to the end of encouraging investment. It accordingly situates corporations within markets and subject to market constraints. But it simultaneously insists that corporations remain independent of markets and that the element of independence contributes materially to their success as producers. The TPM also integrates the inherited framework of corporate law into an economically derived model of production. It offers a microeconomic description of the firm that is firmly rooted in corporate doctrine but is neither focused on nor limited by a description of principal-agent relationships among shareholders, board members, and managers.

In thus leaving agency behind as it fused microeconomics and legal doctrine into a theory of the firm, the TPM taught three groundbreaking lessons, two about methodology and one about substance. First, nothing binds microeconomic analysis together with a theory of the firm rooted in the normative view that the purpose of the corporation is to maximize value of the shareholders. Second, microeconomics, with its emphases on efficiency and maximization, can be deployed to serve an allocatively sensitive description of corporate governance, providing a more capacious methodological tent than anyone on corporate law theretofore had understood. Third, it is not only possible but arguably necessary to take corporate law seriously when articulating a microeconomic theory of corporate production. To the extent an economic model’s description of the appropriate legal framework differs materially from the inherited legal framework, there is a possible, even a probable, infirmity in the model.

My review of the TPM does not address the question whether it is correct (or more appropriate) in some sense that renders agency theory incorrect (or less appropriate). So to do is to join a search for the firm’s essential nature, and to draw exclusionary lines around the descriptive essence, once established. Such exercises can be insightful and have been executed with great analytical facility. Essentialist claiming and counterclaiming is an academic pastime drawing many enthusiastic participants. It has a downside, however. Essentialism means exclusion that, however convenient as a prop to theoretical simplicity, leads to inaccuracy. In legal contexts, bad policy follows.

The review does address a different version of the correctness question. Agency has been and continues to be the dominant paradigm, with most observers in the field employing it exclusively. Descriptive exclusions do follow. So the more pertinent question is whether the TPM is a necessary concomitant. Here the answer is a strong affirmative. Both approaches focus on critical points of incompleteness in corporate contracts, points from which incentive problems and other costly frictions tend to emanate. Focusing only on agency (or focusing only on team production) leads to descriptive distortion.

The review also highlights some of the TPM’s limitations. Blair and Stout, as they went about dotting all the i’s and crossing all the t’s on their way to closure, carefully delimited the model’s field of application. Strictly speaking, the TPM is not a theory of the firm but a theory of a subset of firms—publicly traded corporations with separated ownership and control as they appeared at the time Blair and Stout wrote in the late 1990s. The limitation, although it bespeaks expedience, also turns out to be a source of long run benefits. The TPM is more robust today than it would have been without tight confines.

Despite its evident strengths, the TPM did not achieve paradigmatic dominance, or even general acceptance as a useful alternative perspective. This is because corporate legal theory is not at bottom about descriptive accuracy or methodological correctness. It is above all responsive to normative concerns. The academic community’s equivocal reception of the TPM demonstrates the depth of its commitment to the norm that corporate managers be held accountable for their exercises of the power to direct the business and its continued view that corporate law fails adequately to assure accountability. The TPM stands for a contrasting, contractarian proposition—that market and legal constraints adequately (if not perfectly) control managers and that the salient normative concern is the encouragement of firm-specific investment. The choice between the two perspectives is a judgment call, an exercise likely to be influenced heavily by ideological preferences. It thus is not Blair and Stout’s fault that the wider community did not accept their model’s normative invitation, however well made.

Meanwhile, no one knows what the future may bring. As more and more power accretes to shareholders, a converse accountability problem becomes more and more salient. An adjustment of academic views remains a distinct possibility.

The complete paper is available for download here.

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