THE CORPORATION IS a legal method for organizing a firm that comprises contractual and quasi-contractual relationships between the firm’s various constituents. The corporate form does not merely serve to organize economic activity in a manner avoiding the costs of carrying out exchange transactions in the market, but it also makes available to the firm the advantages of legal entity status, transferable equity shares, limited shareholder liability and centralized management. Incorporation under a corporate statute serves to avoid the transaction costs that would be incurred if the same characteristics had to be accomplished by means of private bargaining.
KeywordsTransaction Cost Limited Liability Liability Rule Residual Claim Equity Share
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