Organizational law as asset partitioning

Organizational law - comprising the bodies of law that govern standard lega l entities such as business corporations, partnerships, cooperatives, nonpr ofit organizations, trusts, limited liability companies, and marriages - se rves many functions of an essentially contractual character. These contract ual functions - which include most matters involving the allocation of auth ority and earnings among the participants in the firm - could, however, be performed relatively easily by private contracting even in the absence of o rganizational law. A far more important function of organizational law, we argue, is its role in partitioning property lights between creditors of a f irm and creditors of the firm's owners and managers. In particular, organiz ational law plays a crucial role in permitting the formation of a separate pool of assets that can be pledged to bond the contracts of which the firm is the nexus. While the law's role in partitioning off these bonding assets is seldom remarked, it is far more significant than the better-studied rul e of limited liability that characterizes many, but not all, legal entities . (C) 2000 Elsevier Science B.V. All rights reserved. JEL classification: D 23; K22; L22.