Alchian and Demsetz' original solution to a much simpler version of this problem was that team members would implicitly agree to allow one member of the team to be the monitor". The monitor was supposed to compensate everyone else according to their marginal opportunity cost, and make sure that no one shirks. Then, to be sure that the monitor has adequate incentives to do her job Alchian and Demsetz suggested that team members would agree that the monitor should be given all of the residual value, over and above the operating costs. In other words, team members would agree to let one person be the"owner". Alchian and Demsetz used their model as an explanation for the emergence of the capitalist firm Oliver Hart and his coauthors tackled a more complex version of the same problem by asking what should happen if the production activity of interest required enterprise-specific investments by the articipants, and was so complex that it was too costly or difficult, or impossible, to monitor the inputs dequately. Their answer was similar to the alchian and demsetz answer: one person should be designated as the "owner", with that person given the authority to fill in the gaps in the contracts by making all the residual or unassigned decisions These two stories, in which ownership emerges as the solution, are probably reasonable descriptions of what happens in individual proprietorships. But these stories are not helpful or accurate descriptions of what happens in most corporations. In all corporations except for those that are just individual proprietorships "in drag, the monitoring roles, the decision-making roles, and the residual claims roles have been divided up. Often, whole teams of people play these roles, and different individuals may cycle on and off of the different teams. As Adolf Berle and Gardiner Means noted seven decades ago when they pointed out that"ownership?"had been separated from "control, the capitalist-as-owner model just does not tell us what modern corporations are really about The team production argument suggests that the separation of control rights and residual claim rights in corporations should not be regarded as a pathology that needs to be corrected --as a substantial amount of corporate governance theory and corporate legal theory has done for the last thirty to forty years. Rather, this separation is what makes the corporate form unique and useful. In fact, Stout and i have argued that the corporate form provides an alternative solution to the contracting problems presented by team production. The corporate form provides a hierarchical decision-making structure to fill in the gaps in the incomplete contracts among the participants in the Consider what corporate law accomplishes that cannot be accomplished by simple contracts At the time the corporation is formed, a separate legal entity comes into being. That separate entity has the legal authority to own property and write contracts with all of the participants. One of the BErle, Jr, and Means(1932)11Berle, Jr., and Means (1932). 6 Alchian and Demsetz’ original solution to a much simpler version of this problem was that team members would implicitly agree to allow one member of the team to be the “monitor”. The monitor was supposed to compensate everyone else according to their marginal opportunity cost, and make sure that no one shirks. Then, to be sure that the monitor has adequate incentives to do her job, Alchian and Demsetz suggested that team members would agree that the monitor should be given all of the residual value, over and above the operating costs. In other words, team members would agree to let one person be the “owner”. Alchian and Demsetz used their model as an explanation for the emergence of the capitalist firm. Oliver Hart and his coauthors tackled a more complex version of the same problem by asking what should happen if the production activity of interest required enterprise-specific investments by the participants, and was so complex that it was too costly or difficult, or impossible, to monitor the inputs adequately. Their answer was similar to the Alchian and Demsetz answer: one person should be designated as the “owner”, with that person given the authority to fill in the gaps in the contracts by making all the residual or unassigned decisions. These two stories, in which ownership emerges as the solution, are probably reasonable descriptions of what happens in individual proprietorships. But these stories are not helpful or accurate descriptions of what happens in most corporations. In all corporations except for those that are just individual proprietorships “in drag”, the monitoring roles, the decision-making roles, and the residual claims roles have been divided up. Often, whole teams of people play these roles, and different individuals may cycle on and off of the different teams. As Adolf Berle and Gardiner Means noted seven decades ago when they pointed out that “ownership” had been separated from “control,” the capitalist-as-owner model just does not tell us what modern corporations are really about11 . The “team production” argument suggests that the separation of control rights and residual claim rights in corporations should not be regarded as a pathology that needs to be corrected -- as a substantial amount of corporate governance theory and corporate legal theory has done for the last thirty to forty years. Rather, this separation is what makes the corporate form unique and useful. In fact, Stout and I have argued that the corporate form provides an alternative solution to the contracting problems presented by team production. The corporate form provides a hierarchical decision-making structure to fill in the gaps in the incomplete contracts among the participants in the enterprise. Consider what corporate law accomplishes that cannot be accomplished by simple contracts: At the time the corporation is formed, a separate legal entity comes into being. That separate entity has the legal authority to own property and write contracts with all of the participants. One of the