Some economists, following Knight,
have identified the bearing of risks of
wealth changes with the director or central
employer without explaining why that is
a viable arrangement. Presumably, the
more risk-averse inputs become employees
rather than owners of the classical firm.
Risk averseness and uncertainty with regard
to the firm's fortunes have little, if
anything, to do with our explanation although
it helps to explain why all resources
in a team are not owned by one
person. That is, the role of risk taken in
the sense of absorbing the windfalls that
buffet the firm because of unforeseen competition,
technological change, or fluctuations
in demand are not central to our
theory, although it is true that imperfect
knowledge and, therefore, risk, in this
sense of risk, underlie the problem of
monitoring team behavior. We deduce the
system of paying the manager with a
residual claim (the equity) from the desire
to have efficient means to reduce shirking
so as to make team production economical
and not from the smaller aversion to the
risks of enterprise in a dynamic economy.
We conjecture that "distribution-of-risk"
is not a valid rationale for the existence
and organization of the classical firm.