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Vanderbilt Law Review

First Page

1875

Abstract

Corporate-law scholarship for decades has been occupied with agency costs and how to mitigate them. But when I teach the basic business organizations class, starting with agency law and looking at the fiduciary duties of care, loyalty, and full disclosure of any agent to her principal, we explore both costs and benefits of agency relationships. I do so by introducing Ronald Coase’s theory of the firm. Using an example close to most second-year law students’ experience, that of buying a suit for interviews, I contrast Brooks Brothers establishing its own factories (the “make” decision) with Brooks Brothers using supply chains, contractors, and subcontractors (the “buy” decision) to produce its clothing. After discussing Coase’s ideas on transaction-cost economics and managerial hierarchy, I then ask the students how law fits into the picture. How could the fiduciary duties of agents within a firm reduce transaction costs in the “make” decision versus the “buy” decision

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