Firms and Fiduciaries

Abstract

Economists who study the theory of the firm strive to draw a line between firms and markets. This line corresponds to the line lawyers draw between fiduciary and nonfiduciary relationships. The Critical Resource Theory (“CRT”) of fiduciary relationships is motivated by the property-rights theory of the firm. CRT holds that the distinguishing feature of fiduciary relationships is that “a fiduciary exercises discretion with respect to a critical resource belonging to the beneficiary, whereas most contracting parties exercise discretion only with respect to their own performance under the contract.”In this chapter, I refine the description of “resources” under CRT using the property-rights theory of the firm and the resource-based view of the firm and extend the analysis of CRT to two important implications flowing from the basic structural insight: (1) while some features of fiduciary relationships are traceable to the logic of contract and some features are traceable to the logic of property, fiduciary relationships are unique hybrid institutions; and (2) the distinctive duty of loyalty that is imposed on fiduciary relationships is designed to protect the beneficiary’s property-like interest in critical resources.