To discipline team members and reduce
shirking, the residual claimant must have
power to revise the contract terms and incentives
of individual members without
having to terminate or alter every other
input's contract. Hence, team members
who seek to increase their productivity
will assign to the monitor not only the
residual claimant right but also the right
to alter individual membership and performance
on the team. Each team member,
of course, can terminate his own
membership (i.e., quit the team), but
only the monitor may unilaterally terminate
the membership of any of the
other members without necessarily terminating
the team itself or his association
with the team; and he alone can expand or
reduce membership, alter the mix of
membership, or sell the right to be the
residual claimant-monitor of the team. It
is this entire bundle of rights: 1) to be a
residual claimant; 2) to observe input
behavior; 3) to be the central party common
to all contracts with inputs; 4) to
alter the membership of the team; and
5) to sell these rights, that defines the
ownership (or the employer) of the classical
(capitalist, free-enterprise) firm. The
coalescing of these rights has arisen, our
analysis asserts, because it resolves the
shirking-information problem of team
production better than does the noncentralized
contractual arrangement.