Separation of Ownership and Control
![handle is hein.journals/jlecono26 and id is 313 raw text is: SEPARATION OF OWNERSHIP
AND CONTROL*
EUGENE F. FAMA and MICHAEL C. JENSEN
University of Chicago University of Rochester
I. INTRODUCTION
ABSENT fiat, the form of organization that survives in an activity is the
one that delivers the product demanded by customers at the lowest price
while covering costs.' Our goal is to explain the survival of organizations
characterized by separation of ownership and control-a problem
that has bothered students of corporations from Adam Smith to Berle and
Means and Jensen and Meckling.2 In more precise language, we are con-
cerned with the survival of organizations in which important decision
agents do not bear a substantial share of the wealth effects of their de-
cisions.
We argue that the separation of decision and risk-bearing functions
observed in large corporations is common to other organizations such as
large professional partnerships, financial mutuals, and nonprofits. We
contend that separation of decision and risk-bearing functions survives in
these organizations in part because of the benefits of specialization of
* This paper is a revision of parts of our earlier paper, The Survival of Organizations
(September 1980). In the course of this work we have profited from the comments of R.
Antle, R. Benne, F. Black, F. Easterbrook, A. Farber, W. Gavett, P. Hirsch, R. Hogarth,
C. Holderness, R. Holthausen, C. Home, J. Jeuck, R. Leftwich, S. McCormick, D. Mayers,
P. Pashigian, M. Scholes, C. Smith, G. Stigler, R. Watts, T. Whisler, R. Yeaple, J. Zimmer-
man, and especially A. Alchian, W. Meckling, and C. Plosser. Financial support for Fama's
participation is from the National Science Foundation. Jensen is supported by the Man-
agerial Economics Research Center of the University of Rochester.
l Armen A. Alchian, Uncertainty, Evolution and Economic Theory, 58 J. Pol. Econ. 211
(1950), is an early proponent of the use of natural selection in economic analysis. For a
survey of general issues in the analysis of organizations, see Michael C. Jensen, Organiza-
tion Theory and Methodology, 50 Accounting Rev. (1983).
2 Adam Smith, The Wealth of Nations (Cannan ed. 1904) (1st ed. London 1776); Adolf A.
Berle & Gardiner C. Means, The Modem Corporation and Private Property (1932); Michael
C. Jensen & William H. Meckling, Theory of the Firm: Managerial Behavior, Agency Costs
and Ownership Structure, 3 J. Financial Econ. 305 (1976).
[Journal of Law & Economics, vol. XXVI (June 1983)]
© 1983 by The University of Chicago. All rights reserved. 0022-2186/83/2602-0011$01.50
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