individual scientist. The computer code generated by the programmer becomes the property of the Neither are shareholders the owners" " in any normal sense of the word. Shareholders contract for a residual claim position, in the sense that if things do not work out, the enterprise folds, and the assets are liquidated, they have agreed to be last in line to receive payouts, with all other claimants eing paid first. Also, if the firm continues as a going business, profits that are left over on a period-by eriod basis after other claimants have received timely payments, may be considered available to pay dividends. Or they may be retained and reinvested. If things work out well, such retained assets may grow substantially over time But, importantly, as long as those assets are not paid out, there is no guarantee that they will eventually go to shareholders. The board has the authority at any time to use those accumulated profits to reinvest, or even to raise payments to the other participants. In exchange for giving up so much in the way of control, shareholders as a group are given veto rights over the selection of directors How does this arrangement solve the contracting problem in team production? Why would any of the team members enter into such a deal, knowing that by incorporating, they lose control rights over the over the investments they make in the corporation, over the resources they are using in production, and over the division of economic rents and quasi-rents generated by the enterprise? The answer is that team members understand that they must collectively give up control rights in order to elicit the full cooperation and contributions of the other team members. Ex ante, they all understand that they will all be better off if they can agree to work together, and not waste resources trying to capture rents from each other. They bind themselves to this cooperative arrangement by giving up control to a decision-making hierarchy This argument has a number of implications for the theory of the firm, for practical discussions about corporate governance, and for understanding corporate law First of all, while the institution of private "property is an important mechanism for closing the gaps in incomplete contracts, it is not the only mechanism. Corporate law provides an alternative mechanism. Corporate law, then, is not just an extension of contract law. Instead, it sets up a hierarchical governance structure, headed by a board of directors, to make the decisions that fill in the gaps in the contracts among all the participants. Corporate law creates a zone of decision-making, within which courts will be extremely reluctant to interfere. Courts will, instead, leave nearly all ecisions about the use of team assets, and the allocation of team rents, up to the board of directors Shareholders also have a legal right to nominate an alternative slate of directors if they meet certain requirements. But waging such a"proxy fight is costly and difficult.13 Shareholders also have a legal right to nominate an alternative slate of directors if they meet certain requirements. But waging such a “proxy fight”is costly and difficult. 8 individual scientist. The computer code generated by the programmer becomes the property of the firm. Neither are shareholders the “owners” in any normal sense of the word. Shareholders contract for a residual claim position, in the sense that if things do not work out, the enterprise folds, and the assets are liquidated, they have agreed to be last in line to receive payouts, with all other claimants being paid first. Also, if the firm continues as a going business, profits that are left over on a period-by￾period basis after other claimants have received timely payments, may be considered available to pay dividends. Or they may be retained and reinvested. If things work out well, such retained assets may grow substantially over time. But, importantly, as long as those assets are not paid out, there is no guarantee that they will eventually go to shareholders. The board has the authority at any time to use those accumulated profits to reinvest, or even to raise payments to the other participants. In exchange for giving up so much in the way of control, shareholders as a group are given veto rights over the selection of directors13 . How does this arrangement solve the contracting problem in team production? Why would any of the team members enter into such a deal, knowing that by incorporating, they lose control rights over the over the investments they make in the corporation, over the resources they are using in production, and over the division of economic rents and quasi-rents generated by the enterprise? The answer is that team members understand that they must collectively give up control rights in order to elicit the full cooperation and contributions of the other team members. Ex ante, they all understand that they will all be better off if they can agree to work together, and not waste resources trying to capture rents from each other. They bind themselves to this cooperative arrangement by giving up control to a decision-making hierarchy. This argument has a number of implications for the theory of the firm, for practical discussions about corporate governance, and for understanding corporate law. First of all, while the institution of private “property” is an important mechanism for closing the gaps in incomplete contracts, it is not the only mechanism. Corporate law provides an alternative mechanism. Corporate law, then, is not just an extension of contract law. Instead, it sets up a hierarchical governance structure, headed by a board of directors, to make the decisions that fill in the gaps in the contracts among all the participants. Corporate law creates a zone of decision-making, within which courts will be extremely reluctant to interfere. Courts will, instead, leave nearly all decisions about the use of team assets, and the allocation of team rents, up to the board of directors