The Essential Role of Agency Law: Agency Law As Asset Partitioning
Abstract: This article suggests a shift in how we think about agency. The essential function of agency law lies not in enabling the delegation of authority, as is widely suggested, but more significantly in its effect on creditors’ rights through asset partitioning. Most of what agency law does in commerce could be accomplished through standard-form contracts, providing default terms for the relationships among firms, their managers, and third parties. Even agency’s much-vaunted fiduciary duties are easily altered or waived by contract. This article identifies the role agency law plays that parties could not contractually replicate. This role is asset partitioning: Just as limited liability and organizational law partition off the assets of a firm’s owners from the assets of the firm itself, agency law partitions off the assets and liabilities of a firm’s managers from the firm’s own assets. Asset partitioning shows that whether owners or managers should be liable for a firm’s unpaid contracts is not a win-lose distributional question, but can be socially efficient. Through simplifying and specializing asset pools, asset partitioning lowers the cost of monitoring the firm’s assets and thus the cost of credit. More generally, legal personality enables the parties that control a firm (its owners and managers) to contribute financial and human capital to the firm, while maintaining a separation between their assets and liabilities and the assets and liabilities of the firm itself.
