The central questions for economic theories of the firm concern how the production of a good is organized (in the market or within a firm) and why that organization prevails. Derivative to these questions, legal scholars ask how the law affects and is affected by any particular organizational structure. Emerging literature looks at these questions in connection with the law of intellectual property. The prevailing theories in that literature focus primarily, though not exclusively, on patent law and generally adopt a property-rights theory of the firm. Those theories, focusing on residual control and hold-up problems, have shown that as patent rights become stronger, firms may become smaller because property rights facilitate market transactions that would otherwise be too costly. Small, innovative suppliers will not invent component inputs if they cannot protect their invention against post-disclosure appropriation. The producers of the final product will therefore have to develop the technology in-house or the invention supplier will have to perform the postinvention development itself. These insights have important implications for the design of law. This Essay thus highlights an area of intellectual production that cannot be explained by the existing literature on intellectual property and the theory of the firm, and it suggests that some underappreciated alternate theories—like team production—might be at play. I do not claim that the conclusions found in the existing literature are incorrect, but rather that they are limited in scope. Property-rights theories tell us about whether and how an existing intellectual input or the modular unit that produces it will be integrated within a larger development firm but less about how the input will be created in the first place—that is, how the modular unit will itself be organized.
Anthony J. Casey, Mind Control: Firms and the Production of Ideas, 35 SEATTLE U. L. REV. 1061 (2012).