The Structure of Ownership and the Theory of the Firm
![handle is hein.journals/jlecono26 and id is 387 raw text is: THE STRUCTURE OF OWNERSHIP AND
THE THEORY OF THE FIRM*
HAROLD DEMSETZ
University of California, Los Angeles
THE separation of ownership and control in the modern corporation, an
issue brought to the fore so effectively by Berle and Means fifty years ago,
retains a central position in recent writings about the economic theory of
the firm. The problem is stated succinctly by Berle and Means:
The separation of ownership from control produces a condition where the inter-
ests of owner and of ultimate manager may, and often do, diverge, and where
many of the checks which formerly operated to limit the use of power dis-
appear....
In creating these new relationships, the quasi-public corporation may fairly be
said to work a revolution. It ... has divided ownership into nominal ownership
and the power formerly joined to it. Thereby the corporation has changed the
nature of profit-seeking enterprise.'
The holder of corporate stock experiences a loss of control over his
resources because ownership is so broadly dispersed across large num-
bers of shareholders that the typical shareholder cannot exercise real
power to oversee managerial performance in modern corporations. Man-
agement exercises more freedom in the use of the firm's resources than
would exist if the firm were managed by its owner(s), or at least, if own-
ership interests were more concentrated. Because management and own-
ership interests do not naturally coincide when not housed in the same
person, Berle and Means perceive a conflict of interest, which, with own-
ership dispersed, is resolved in management's favor.
To Berle and Means, this signifies a serious impairment of the social
function of private property. Profit maximization constrained and guided
by competition is the link between private ownership and efficient re-
source utilization, a link presumably broken by a structure of ownership
* This study benefited from suggestions made by Professors Ken Lehn and Barry Weing-
ast. Financial support was provided by a Sloan Foundation grant to UCLA.
' Adolf A. Berle & Gardiner C. Means, The Modem Corporation and Private Property 6
(1932).
[Journal of Law & Economics, vol. XXVI (June 1983)]
© 1983 by The University of Chicago. All rights reserved. 0022-2186/83/2602-0005$01.50](ViewImageLocal?handle=hein.journals/jlecono26&div=26&collection=journals&method=preview&ext=.png&size=3)
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The Structure of Ownership and the Theory of the Firm
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