Some of the work that my colleague Lynn Stout and i have been doing in the last few ye provides an explanation for this paradox Consider the central economic and contractual problems that must be solved when a group of people get together to undertake some joint economic enterprise. Note that we assume that a"group of people" are involved. We do this because the corporate form would not be necessary for organizing production if all production were undertaken by individuals acting alone, using assets they own directly It would not even be necessary if all production were undertaken by individual property owners working with and directing the efforts of a group of employees. The individual proprietorship form has been used for centuries for such arrangements The corporate form came to be used, and continues to be used today, to organize production activities that are too large and too complex to be organized, managed, and financed by a single individual. To be sure, the corporate form has often been co-opted by individual proprietors who want the benefits of limited liability. But it is abundantly clear that the corporate form was not invented just to give limited liabil ity to individual proprietors. The form exists primarily, if not exclusively, to organize enterprises that require complex inputs from a large number of individuals Professor Stout and I use the phrase team production"to refer to the kind of complex organizational problem that we feel provides the primary rationale for the corporate form. We borrow the basic idea from work done in the early 1970s by armen alchian and harold demsetz who define team production as"production in which(1) several types of resources are used. (2)the product not a sum of separable outputs of each cooperating resource. and] (3)not all resources used in team production belong to one person We think this description probably applies to a very large part of production in modern economies. Team production presents severe contracting problems. Think about the complex interactions among numerous individuals required to develop a new drug to treat depression, for example. The research effort may involve the work of teams of biochemists, neurobiologists, and 5 See especially Blair and Stout(1999)p. 247 6 For small businesses, the choice of organizational form may also often be influenced by tax considerations 7 Early general incorporation laws in the United States usually required more than one party to be involved, and did not always provide for limited liability for shareholde See blair and Stout(1999) See Alchian and Demsetz(1972)p 7795 See especially Blair and Stout (1999) p. 247. 6 For small businesses, the choice of organizational form may also often be influenced by tax considerations. 7 Early general incorporation laws in the United States usually required more than one party to be involved, and did not always provide for limited liability for shareholders. 8 See Blair and Stout (1999). 9 See Alchian and Demsetz (1972) p. 779. 4 Some of the work that my colleague Lynn Stout and I have been doing in the last few years provides an explanation for this paradox5 . Consider the central economic and contractual problems that must be solved when a group of people get together to undertake some joint economic enterprise. Note that we assume that a “group of people” are involved. We do this because the corporate form would not be necessary for organizing production if all production were undertaken by individuals acting alone, using assets they own directly. It would not even be necessary if all production were undertaken by individual property owners working with and directing the efforts of a group of employees. The individual proprietorship form has been used for centuries for such arrangements. The corporate form came to be used, and continues to be used today, to organize production activities that are too large and too complex to be organized, managed, and financed by a single individual. To be sure, the corporate form has often been co-opted by individual proprietors who want the benefits of limited liability6 . But it is abundantly clear that the corporate form was not invented just to give limited liability to individual proprietors7 . The form exists primarily, if not exclusively, to organize enterprises that require complex inputs from a large number of individuals. Professor Stout and I use the phrase “team production” to refer to the kind of complex organizational problem that we feel provides the primary rationale for the corporate form8 . We borrow the basic idea from work done in the early 1970s by Armen Alchian and Harold Demsetz who define team production as “production in which (1) several types of resources are used…(2) the product is not a sum of separable outputs of each cooperating resource…[and] (3) not all resources used in team production belong to one person”9 . We think this description probably applies to a very large part of production in modern economies. Team production presents severe contracting problems. Think about the complex interactions among numerous individuals required to develop a new drug to treat depression, for example. The research effort may involve the work of teams of biochemists, neurobiologists, and