| Chapter 1: | Theoretical Review |
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agency theory, per se, the stated purpose of his paper was, in Coase’s own words,
In the final sections, Coase moved closer to agency theory, speaking of the legal relationship between “master and servant” (employer and employee), where the servant’s duty is to render personal services to the master, who has the right to control the servant’s work, either personally or through a third party agent. In this regard, Coase quoted Batt (1933) on the distinction between a servant and an agent. According to Batt, this distinction can be reduced to “the freedom with which an agent may carry out his employment” (Coase, p. 404). This is a continuum; the servant performs a task under the direct supervision of his master, while the agent has the freedom to do whatever it takes to achieve the overall objectives of the master. While these ideas do not yet approach the sophistication of subsequent developments in agency theory, Coase did link the economic construct with the legal framework, and laid out the foundation for further research on these important legal relationships.
Literature in the third group viewed the firm as a nexus of contracts linking various factors of production. Fama (1980) refined the link between the economic concept and agency theory. The main thesis was that the separation of ownership and control could be explained as an efficient form of economic organization within the “set of contracts” perspective. For Fama,