The essence of the classical firm is
identified here as a contractual structure
with: 1) joint input production; 2) several
input owners; 3) one party who is common
to all the contracts of the joint inputs;
4) who has rights to renegotiate any
input's contract independently of contracts
with other input owners; 5) who
holds the residual claim; and 6) who has
the right to sell his central contractual
residual status. The central agent is called
the firm's owner and the employer. No
authoritarian control is involved; the arrangement
is simply a contractual structure
subject to continuous renegotiation
with the central agent. The contractual
structure arises as a means of enhancing
efficient organization of team production.
In particular, the ability to detect shirking
among owners of jointly used inputs in
team production is enhanced (detection
costs are reduced) by this arrangement and
the discipline (by revision of contracts) of
input owners is made more economic.