Rights and Production Functions: An Application to Labor-Managed Firms and Codetermination

It is traditional in the theory of the to define the production opportunity set available to the in terms of its boundary-the maximum attainable set of output quantities for various input quantities, given the state of technology and knowledge. This boundary is the production function of the firm. One of our purposes here is to point up the dependence of suchproduction functions on the structure of property rights and contracting rights within which the exists. We redefine the production function in order to recognize the dependence of output on the structure of property and contracting rights. That We redefine the production function to incorporate its dependence on the structure of property and contracting rights within which the exists. The problems surrounding the role of labor in the for a variety of rights str-uctures are analyzed recognizing this dependence. These structures include (1) the firm system (in which common stock claims are legally prohibited), (2) the codetermination and industrial democracy movements (in which the law requires management participation by labor), (3) cooperatives and professional partnerships (i.e., quasi-labormanaged firms which arise out of voluntary contracting), and (4) the capitalist corporation. We criticize the claim that labor-managed firms are efficient. Presented at the Conference on the Effects of Labor Participation in the Management of Business Firms in the Western World, Dallas, February 1977, sponsored by the Liberty Fund; and at the Fourth Annual Interlaken Seminar on Analysis and Ideology, Interlaken, June 1977, sponsored by the Center for Research in Government Policy and Business at the University of Rochester. We are indebted to David Henderson, Eugene Fama, Keith Leffler, Frank Milne, Tom Russell, Jerold Zimmerman, and the participants in the Economics Workshop at the University of Rochester Graduate School of Management for discussions on these issues, but they should not be held responsible for our refusal to accept some of their suggestions. We are also indebted to an anonymous referee and John Gould for comments, and to Armen Alchian for helping us over the years to understand more clearly the importance of rights in determining human behavior. This work has been partially supported by the Managerial Economics Research Center at the University of Rochester, Graduate School of Management.