Introduction: the incentive bargain of the firm and enterprise law: a nexus of contracts, markets, and laws
The firm is an ongoing joint project requiring both financial and human capital. Like other joint projects, the firm cannot maximize its value added without achieving an efficient “incentive bargain” between its indispensable capital providers, that is, the shareholders and creditors that act as monetary capital providers, along with the management and employees that act as human capital providers (“the four capital providers”). The incentive bargains can be defined as the bargain between the indispensable capital providers of the firm which motivates each actor to provide the capital they own to the joint project, including the bargains for sharing control and the bargains for sharing the firm’s value added. The result of a successful incentive bargain is that each capital provider has the optimal incentive to maximize the firm’s value added. To understand how law influences the firm’s practices, we need an account and theory of “enterprise law,” broadly defined to include the entire range of private contracts and public regulations governing the relationship of these different capital providers. This chapter will illustrate the incentive bargain of the firm by focusing on the interrelationships and complementarities between different institutions, such as markets, social norms and laws. I will also consider some related legislative policy implications.