Shirking and Sharking: A Legal Theory of the Firm Eric W. Ortst Introduction ................................................................................................... 266 I. Agency Law and Agency Costs ............................................................... 270 A. Legal Agency: Authority, Power, and Hierarchy in the Firm ..... 271 B. Agency Costs: Classical Shirking .................................................... 275 II. Principal C osts .......................................................................................... 278 A. Sharking Defined: Opportunism of Principals Within Firms ...... 279 B. Agency Chains: Quasi-Principals and Superior Agents ............... 280 III. Firm s and M arkets ................................................................................. 282 A. The Paradox of Methodological Individualism ............................. 283 B. Consumer Markets and Organizational Metamarkets ................. 286 IV. Economic Theories of the Firm ........................................................... 289 A . Transaction Costs ............................................................................. 289 B . C ontracts ............................................................................................ 291 C . Property .............................................................................................. 295 D . E m ploym ent ...................................................................................... 296 V. A Legal Theory of the Firm and Its Boundaries .................................. 298 A. Control: Enterprise-Organizing and the Sole Proprietor ............ 300 B. Ownership and Employment: Horizontal and Vertical Firms ..... 301 1. H orizontal O wnership ................................................................ 301 2. Vertical A uthority ....................................................................... 303 C. Property: Ownership of the Firm's Capital .................................... 306 t Associate Professor of Legal Studies, The Wharton School, University of Pennsylvania; Visiting Professor of Law, University of Leuven. For comments, I thank Stephen Bainbridge, John Boatright, David Butz, Alfred Conard, Deborah DeMott, Thomas Dunfee, Allison Feder, Merritt Fox, Eric Gauvin, Robert Hamilton, Peter Hammer, J.B. Heaton, Leo Katz, William Klein, Bruce Kogut, Naomi Lamoreaux, Kyle Logue, Ronald Mann, Daniel Raff, Tyler Robin- son, Richard Shell, Alan Strudler, Edward Swaine, Kent Syverud, Randall Thomas, William Tyson, Joseph Vining, and others who participated in discussions of earlier drafts at the Whar- ton School, the Western New England School of Law, the University of Michigan Business School, the UCLA School of Law, and the University of Michigan Law School. Later versions were presented at the University of Erlangen-Nuremberg, Department of Management, and the University of Gothenburg, School of Economics and Commercial Law. The Zicklin Center for Business Ethics Research at the Wharton School provided funding. For inspiration, I thank my wife, Janet, who loves Bleak House, and my students at Wharton and the law schools of Penn, UCLA, and Michigan.