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The Economic Structure of Corporate Law. By Frank H. Easterbrook and Daniel R. Fischel , Cambridge, Mass.: Harvard University Press, 1991. viii + 370 pp. Notes, selected bibliography, and index. $39.95. ISBN 0-674-23538-X.
Over the past two decades, there has been an almost obsessive devotion among lawyers to working out the implications of Ronald Coase's 1937 article, the "Nature of the Firm." Henry Manne's writing during the 1960s initiated the project, and others, like Richard Posner and Kenneth Scott, who edited the Economics of Corporation Law and Securities Regulation (1980), have regularly underscored its progress by publishing collections of essays. One can hope that this collection of essays by Frank Easterbrook and Daniel Fischel (for the most part previously published) will mark an end to that obsession and allow students of business corporations to resume a more encompassing approach to the problems of both organizing production and regulating the resulting organizations.
The authors' analysis, one they mapped out quite succinctly in a 1989 Columbia Law Review article, "The Corporate Contract," focuses on two means of regulating corporate control: the elaboration of rules that perfect capital markets and of rules that curb managerial power. "Why," they ask, "does corporate control allow managers to set the terms under which they will administer corporate assets? Why do courts grant more discretion to self-interested managers than to disinterested regulators? Why do investors entrust such stupendous sums to managers whose acts are essentially unconstrained by legal rules?" (p. 3). They argue that market adjustments circumscribe the implicit risks, that "economic rationality is implicit in corporate law" (p. 315). Specifically, they draw on available financial and economic studies of capital markets and corporate control transactions. More generally, they rely on two sorts of claims about market rules: 1) that competition for corporate control is a more cost-effective check on managerial abuses of power...