Corporate Law as a Solution to Team Production Problems

Abstract

This chapter explains the team production problem as described in economic theory, and presents the argument, first developed by Blair and Stout, that boards of directors serve as a solution to the team production problem. The chapter reviews the legal structure and duties of boards of directors under corporate law to show that directors are called on to make many of the most conflict-laden decisions that must be made in corporations. Thus many of the details of corporate law are consistent with the idea that a primary function of boards of directors is to mediate among important competing interests in the corporation and thereby resolve or head off disputes. The chapter discusses new empirical evidence about what directors do and how they affect the performance of corporations.