Faculty Bibliography

In Russia and elsewhere, proponents of rapid, mass privatization of state-owned enterprises (ourselves among them) hoped that the profit incentives unleashed by privatization would soon revive faltering, centrally planned economies. The revival didn't happen. We offer here some partial explanations. First, rapid mass privatization is likely to lead to massive self-dealing by managers and controlling shareholders unless (implausibly in the initial transition from central planning to markets) a country has a good infrastructure for controlling self-dealing. Russia accelerated the self-dealing process by selling control of its largest enterprises cheaply to crooks, who transferred their skimming talents to the enterprises they acquired, and used their wealth to further corrupt the government and block reforms that might constrain their actions. Second, profit incentives to restructure privatized businesses and create new ones can be swamped by the burden on business imposed by a combination of (among other things) a punitive tax system, official corruption, organized crime, and an unfriendly bureaucracy. Third, while self-dealing will still occur (though perhaps to a lesser extent) if state enterprises aren't privatized, since self-dealing accompanies privatization, it politically discredits privatization as a reform strategy and can undercut longer-term reforms. A principal lesson: developing the institutions to control self-dealing is central to successful privatization of large firms.

The answer we offer is that organizational law goes beyond contract law in one critical aspect, permitting the creation of patterns of creditors' rights that otherwise could not practicably be established. In part, these patterns involve limits on the extent to which creditors of an organization can have recourse to the personal assets of the organization's owners or other beneficiaries--a function we term "defensive asset partitioning." But this aspect of organizational law, which includes the limited liability that is a familiar characteristic of most corporate entities, is of distinctly secondary importance. The truly essential function of organizational law is, rather, "affirmative asset partitioning." In effect, this is the reverse of limited liability: It involves shielding the assets of the entity from the creditors of the entity's owners or managers. Affirmative asset partitioning offers efficiencies in bonding and monitoring that are of signal importance in constructing the large-scale organizations that characterize modern economies. Surprisingly, this crucial function of organizational law--which is essentially a property-law-type function--has largely escaped notice, much less analysis, in both the legal and the economics literature.