On the Origins, Meaning and Influence of Jensen and Meckling's Definition of the Firm

Abstract

Jensen and Meckling’s 1976 definition of the firm as a legal fiction which serves as a nexus of contracts between individuals sits well with the Coasean narrative on the firm while at the same time being at odds with it. Available interviews with Jensen shed little light on the origins and meaning of this unusual definition. The article shows how the definition captured, and was a response to, the American socio-political context of the first half of the 1970s, and traces how Jensen and Meckling employed it once they themselves got immersed in the public debate about corporate regulation in the late 1970s. It also briefly considers Jensen and Meckling’s place in the literature on the economics of corporate law developed in the 1980s.