The advantages of the corporate form—an impossibility theorem on persons and things

Abstract

The literature tends to view the firm either as a person or as a thing. Due to this dichotomy, it struggles with the proposition that the corporate form brings about efficiency gains that cannot be accomplished by other types of profit-seeking firms. This study supplies game-theoretic proof for this proposition. It identifies a capital-intensive business that requires external financing and is vulnerable to a holdup by a supplier. It shows that only the corporate form can organise the business while other types of firms fail. This advantage of the corporate form over other types of firms is due to its Janus-faced nature as both person, that is endowed with legal capacity, and thing, such as a transferable bundle of assets. A long-held tradition of strictly separating persons and things fails to account for this advantage.