Agency Problems and the Theory of the Firm
Eugene F. Fama
The Journal of Political Economy, Vol. 88, No. 2. (Apr., 1980), pp. 288-307.
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Tue Sep 4 18:57:53 2007
Agency Problems and the Theory of the Firm
Eugene F. Fama
C nz11c~rr2fi( I / f h>ta,gn
This paper attempts to explain how the separation of security own-
ership and control, typical of large corporations, can he an efficient
form of econornic organization. \.Ve first set aside the presumption
that a corporation has olvners in any meaningful sense. The entre-
preneur is also laid to rest, at least for the purposes of the large
modern corporation. The two functions usually attributed to the
entrepreneur-management and risk bearing-are treated as natu-
rally separate hctor5 Lvithin the set of contracts calletl a f ~ rm . The firm
is disciplinetl by cornpetition frorn other firrns, which fi)~.ces the
evolution of devices for efficiently monitoring the performance of
the entire team and of its individual mernbers. Intlividual partici-
pants in the firrn, and in particular its managers, face both the
tliscipline and opportunities providetl Ily the markets for their ser-
vices, both within ant1 outside the firm.
Econo~nists have long been concerned with the incentive problems
that arise when decision ~nak ing in a firm is the province of managers
who are not the firm's securit) holders.' One outcome has been the
development of "behavioral" and "managerial" theories of the firm
which reject the classical model of an entrepreneur, o r olvner-
?-his research is supported by the Sational Science Foundation. Roger Kormendi has
contributed much, and the comments of A. Alchian, S. Bhattacharya, C;. Becker, F.
Black, h1. Blurne, hl. Bradley, D. Breeden, N. Gonedes, B. Horwit7, G. Jarrell, E. f1.
Kim, J . I.ong, H. hlanne, W. hleckling, hl. H. Sliller, 51. Scholes, C. Smith, C;.J. Stigler,
R. Wattb, '1'. Whisler, and,]. Zimmerman are gratefull\ acknorvledged. Presentations at
the finance, labor economics, and industrial organiration workshops of the Unilersity
of' Chicago and the workshop of the Managerial Economics Research Center of the
Cniversity of Rochester have been helpful. I 'he paper is largely an outgrowth of
discussioi~s with hlichael (:. Jensen.
' Jensen and hleckling (1976) quote from Adam Smith (1776). 7-he modern literature
on the problem datrs back at least to Berle and Sleans (1932).
[/ourno/ IV P*i/ili