Organizations And The Law Research Paper

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Scholarship on organizations and the law addresses the relationship between formal organizations—such as private businesses, public agencies, and nonprofit associations—and the legal institutions that govern them. This research paper concentrates solely on the connections between the two. These connections, however, are elaborate and diverse, and different research traditions have explored different territories along three cardinal dimensions. First, separate bodies of scholarship address the relationship between organizations and at least three distinct aspects of law: (a) legal venues as facilitative arenas of organizational interaction (especially disputing), (b) legal precepts as regulative codes of organizational conduct, and (c) legal definitions as constitutive typologies of organizational experience. Second, these various aspects of the legal environment each involve multiple causal orderings: Law not only shapes organizational activity, but organizational activity simultaneously shapes law— and at times both take shape together. Third, for each aspect and each causal order, the relevant mechanisms may operate either through material rewards and penalties, or through cultural morals and meanings, or through complex mixtures of the two. The following pages examine the various images of organizations and the law that lie at the intersections of these multiple dimensions.



1. Intellectual History

1.1 Classical Roots

Classical social theorists saw organizations and the law as closely linked. To Marx (e.g., 1971a, 1971b), capitalist organizational structures provided the economic premises for ‘bourgeois law,’ with its characteristic coupling of formal individual rights— especially rights of property and contract—and repressive police interventions against the working class. To Durkheim (1964), society’s evolution from a unified to a specialized division of labor (and the corresponding shift from communal to limited-purpose organizations) generated a parallel evolution in law, from punitive demonstrations of shared outrage to restitutive compensations for individualized damages. To Weber (1978, pp. 654–58, 956–1005), both modern organizations and modern law drew legitimacy from a shared ‘legal-rational’ reliance on preplanned, explicit, impersonal rules; as a result, both embodied similar tensions between responsiveness and predictability, and between autonomy and domination.

1.2 Mid-Century Revival

Despite these early linkages, subsequent scholarship on organizations and on law developed for the most part independently. A few theorists (e.g., Hurst 1964) attempted to bridge the gap, but most research in each tradition remained oblivious to the other. Since the mid-twentieth century, however, the separation between organizational and legal studies has become increasingly untenable. Organizations form through the legal act of incorporation, and they dissolve through the legal act of bankruptcy. In between, they raise capital under securities law, hire employees under labor law, and exchange goods and services under contract law. Law, for its part, arises from the demands of organizations, and it topples under pressure from organizations as well. In between, it develops meaning through organizational compliance, receives enforcement through organizational litigation, and encounters limits through organizational recalcitrance. Moreover, the organizational and legal worlds have become increasingly intertwined over time, as organizations face rising levels of litigation, regulation, and certification, and as law confronts an ever more bureaucratized society.

In the light of these affinities, a reconciliation between organizational and legal studies was perhaps inevitable, and by the mid-1960s, the early signs of convergence were beginning to emerge. Three lines of scholarship contributed to this rapprochement: a political-science literature on regulation, a sociology literature on legalization, and an economics literature on transaction costs.

1.2.1 Studies Of Regulation. First, from political science (and to a lesser extent from economics and sociology), a number of researchers became interested in the relationship between regulatory agencies and the industries those agencies supposedly oversaw (e.g., Bernstein 1955, Stigler 1971). Although many such investigations started with the assumption that well-chosen penalties could deter organizational wrongdoing, the empirical evidence suggested a more gloomy image: Industries often appeared to ‘capture’ their regulators, resulting in legal rules that limited competition and preserved prevailing practices, rather than imposing reforms. Moreover, even when agencies did attempt to regulate in the public interest, regulated organizations were less likely to be deterred from wrongdoing than to be impelled toward evasion.

1.2.2 Studies Of Legalization. The pessimism of the regulation literature was counterbalanced by a second body of research, originating from sociology. Examining the emergence of disciplinary hearings and other law-like procedures in the workplace, Selznick (1969) suggested that administrative and political pressures could lead organizations to develop internal practices that drew upon the public legal order for models of fairness and objectivity. Over time, these introjections of ‘legality’ tended to become institutionalized—both within organizations as formal policies and procedures, and outside organizations as doctrines and statutes protecting employee rights. Such legalization, Selznick argued, held the potential to transform organizations from authoritarian hierarchies into normatively constrained polities, thereby limiting official power and securing substantial ‘citizenship’ rights for lower-level participants.

1.2.3 Studies Of Transaction Costs. In contrast to the literature on regulation and legalization, a third body of scholarship, emerging primarily from economics, downplayed concerns about making organizations more socially responsible and focused instead on making them more efficient. Drawing heavily on the work of Coase (1937) and Williamson (1975), this tradition linked law and organizations through a set of general arguments about the costs and benefits of ‘hierarchical governance structures,’ whether legal rules or organizational policies. Because human beings are ‘boundedly rational’ (i.e., unable to anticipate all future contingencies) and ‘opportunistic’ (i.e., prone to self-interested dishonesty), certain exchanges will exhibit sizable ‘transaction costs’ in the market: detailed contracts will be difficult to write and enforce, and consequently hierarchical authority structures may prove more efficient than open trading. Since organizations and laws represent alternative forms of hierarchical governance, this analysis speaks equally to concerns about when the legal system should intervene in market activity and to concerns about when organizations should internalize market exchanges.

2. Current Scholarship

In recent years, these three traditions have spawned a resurgence of scholarship on organizations and the law. This resurgence spans the disciplines of political science, sociology, and economics, with offshoots extending into traditional legal and managerial studies. This section reviews the state of this emerging literature, with emphasis on the three major aspects of the legal environment introduced above. Following Edelman and Suchman (1997), these are designated the ‘facilitative,’ ‘regulative,’ and ‘constitutive’ legal environments, respectively.

2.1 Law As An Arena Of Interaction

At its most passive, the legal system simply provides places, personnel, and procedures to accommodate organizational interactions that might otherwise occur elsewhere. The archetypal manifestation of this ‘facilitative’ aspect of law is the lawsuit: organizations routinely employ litigation to open or defend markets, to attack or protect reputations, to reveal or conceal information, and so on. Courthouses are not the only relevant legal facilities, however. Parallel activities arise in other venues as well; for example, organizations use Freedom of Information requests as vehicles for corporate espionage. The unifying theme is that, for better or worse, legal forums provide a crucial public infrastructure for organizational activity, not unlike marketplaces or convention centers. Consequently, while most studies of facilitative law portray organizations as the active players and the legal system as merely the passive arena, most also acknowledge that the contours of this arena may determine the course of the game.

While contemporary legal systems provide facilities for a wide array of organizational activities, the existing literature focuses almost exclusively on disputing—primarily through traditional litigation, but also through ‘alternative dispute resolution’ (ADR) techniques, such as mediation and arbitration. The best available evidence suggests that, in the USA at least, litigation rates have risen dramatically since the early 1970s, largely owing to an increase in the frequency with which business organizations sue one another. Alongside this rise in litigation, however, there has also been a substantial growth in the prevalence of ADR procedures, which proponents claim can curtail the cost, delay, and adverse publicity of conventional adjudication. The resulting climate has been described as one of ‘process pluralism’ (Lande 1997), with an elevated level of overall disputing activity accompanied by a reduced degree of courtroom centrality.

2.1.1 Facilitative Law As Independent Variable. Most scholarship on these trends emphasizes the role of law as an independent variable: changes in the contours of legal forums, researchers argue, produce changes in the behaviors of organizational actors. Because much of this literature emerges from policy debates over litigation reform, investigation generally centers on whether particular procedural rules elicit or suppress lawsuits, and on whether changing rates of litigation exert positive or negative influences on nonlegal organizational activities. Standing-to-sue doctrines, class-action requirements, and contingency fee arrangements have all attracted attention as determinants of litigation behavior, and rising litigation has, in turn, received blame for a wide variety of systemic side-effects, including increased insurance use, elevated bankruptcy rates, and a societal undersupply of high-risk innovation. At the same time, a more up-beat literature on ADR asserts that the growing burdens of full-dress litigation have sparked managerial interest in nonjudicial alternatives, and that the resulting shift in dispute processing has eased workplace tensions and strengthened ongoing business relations. Other commentators, however, have noted that litigation may serve the salutary purpose of promoting corporate social responsibility, and that ADR, in contrast, may cool out genuine grievances and undercut public debate.

Research on the link between forum structure and disputing behavior generally adopts a materialist orientation, examining how legal procedures affect the concrete costs and benefits of various organizational actions. If litigants enter court strategically, then the ‘house rules’ should determine both the attractiveness of the arena and the moves of the players. In addition to such obvious factors as expense, delay, and the magnitude of awards, litigation rates should be particularly sensitive to the predictability of trial outcomes, since rational parties will generally prefer to settle their disputes out of court, if both sides have similar expectations about the results of a trial (Priest and Klein 1984). The most efficient judicial system, in this view, would be one in which the predictability of legal procedures encouraged disputants to resolve most matters through private negotiation, leaving the courts free to decide genuinely contested points of law with as little expense and delay as possible.

Recently, however, a number of culturalist researchers have borrowed from the literature on individuallevel disputing to suggest that such rational-actor analyses may provide only a partial account, at best. Even among sophisticated business organizations, legal disagreements often comprise substantial expressive and symbolic elements, and these cultural factors may play as great a role as rational profit maximization in determining organizational disputing behavior. Thus, where materialists see litigation as ‘economic competition by other means,’ culturalists emphasize the relationship between law and ‘softer’ organizational phenomena such as alliance formation, community building, and reputation management. This perspective is particularly common in studies of ADR, which highlight the ability of dispute processing institutions to preserve or disrupt relationships, to harmonize or polarize viewpoints, and to privatize or publicize disagreements.

2.1.2 Facilitative Law As Dependent Variable. Alongside these analyses of how legal arenas shape organizational behavior, a handful of studies have reversed the causal arrow, to explore how organizational behavior shapes legal arenas. As the transaction-cost tradition suggests, law is only one of many governance mechanisms, and if litigation arises in part from the failure of other controls, then extra-legal organizational conditions may play a crucial role in shaping the work of the courts.

For the most part, the existing literature assumes that the relevant extra-legal conditions are material rather than cultural, with factors such as economic globalization, industrial turbulence, and relational discontinuity topping the list. Clearly, however, cultural conditions may also exert a significant influence. Preliminary findings suggest, for example, that professional ideologies strongly affect whether an organization’s culture favors ADR or litigation; and organizational cultures, in turn, affect whether employees seek to resolve workplace grievances in-house or through the courts. Further, in a mirror image of Selznick’s legalization dynamic, the spread of ADR techniques in the workplace tends to inject private organizational values into public legal discourses: Several major employment laws now explicitly encourage the use of ADR to resolve legal claims, and courts themselves increasingly employ ‘appended’ ADR to expedite settlement negotiations. Thus, the changes that began with rising litigation rates now appear to be coming full circle: where organizations once embraced ADR to escape the perils of formal legal arenas, the legal system is now remodeling its own facilities to replicate these initially alien organizational proceedings. Even when legal institutions are at their most passive, the relationship between law and organizations proves to be both reciprocal and complex.

2.2 Law As A Code Of Conduct

In addition to providing a procedural forum for organizational interaction, law can also act as a system of substantive edicts, invoking societal authority over various domains of organizational activity—from antitrust to labor relations to environmental protection. Formal administrative oversight represents the archetypal manifestation of this ‘regulative’ aspect of law, but similar applications of sovereign authority can also occur through common-law precedents, street-level policing, and privately enforced policy initiatives, such as civil claims against harassment or fraud. In all its guises, regulative law operates not merely as a neutral arena, but as a structure of precepts and enforcement mechanisms designed to channel organizational behavior in particular directions. While regulative law may not always accomplish (or even sincerely intend to accomplish) its stated goals, the distinguishing features of this aspect of the legal environment are its pervasive rhetoric of active social control and its pervasive concern with organizational compliance and evasion.

Regulation is almost certainly the most widely studied aspect of the relationship between organizations and the law. Unfortunately, most investigations to date have focused narrowly on particular substantive areas, and systematic efforts to explore underlying social processes remain relatively rare. Nonetheless, this literature displays a number of recurring materialist and culturalist themes. From a materialist perspective, regulative law serves to counterbalance market imperfections, imposing supplemental incentives and deterrents that recalibrate the implicit prices of various organizational behaviors. Organizations, for their part, seek to maximize total returns in the light of these prices, whether through petition and compliance or through manipulation and evasion. Alongside such economic dynamics, however, legal regulations also implicate significant normative and cognitive beliefs, and tactical maneuvers often cannot fully extricate organizations from these broader cultural processes. As statements of public values, laws shape and reflect what organizational stakeholders want, and as repositories of public meaning, laws frame and recapitulate what organizational stakeholders expect. Consequently, the underlying cultural logics of the organizational and legal realms often move in tandem, even as particularly recalcitrant firms seek to amend or evade particularly burdensome strictures.

2.2.1 Regulative Law As Independent Variable. Tracing, first, the causal pathway from regulative edicts to organizational responses, research suggests that such legal pronouncements can operate both as material threats and as cultural sermons. As material threats, laws exert their greatest influence when standards are clear, sovereignty uncontested, and sanctions substantial. In practice, however, such ideal conditions rarely pertain, and in their absence, self-interested organizations react not only to the incentives enunciated by law ‘on the books,’ but also to the real-world gaps provided by ambiguous statutes, fragmented jurisdictions, and manipulable enforcement agencies. These gaps, substantial in themselves, grow still wider in the face of organizational characteristics such as specialization and decentralization, which marginalize legal personnel and insulate managers from responsibility for corporate transgressions. As a result, the history of regulation is replete with unintended consequences: disclosure requirements foster uninformative disclaimers, tort liability shifts hazardous activities into undercapitalized subsidiaries, and air-quality standards export pollutants to downwind communities. Although few would rule out the possibility of successful deterrence, the common theme behind much of this materialist research is that regulative law may exert its largest effects by motivating evasion, not compliance.

The pessimism of this literature stems in large part from the assumption that rational organizations lack the moral sentiments that promote individual-level obedience to law. Recent studies of law as a cultural sermon, however, call this assumption into question. Organizational behavior, after all, reflects the activity of culture-bearing individuals operating within decision structures that incorporate cultural values and presumptions at every turn. The leading attempt to examine regulative law through this culturalist lens comes from ‘neo-institutional’ sociologists, working broadly in the Selznickian tradition. To these researchers, legal compliance simply represents a special case of ‘institutional isomorphism’—the process by which organizations facing similar cultural rule systems become both increasingly alike and increasingly congruent with the myths of their shared environment. In addition to applying material coercion, legal institutions also homogenize organizational behavior through both normative and cognitive beliefs: law enunciates values and ethics which organizations then elaborate and internalize; and law provides models and scripts, which organizations then imitate and enact. While the resulting isomorphism often amounts to little more than superficial ceremony, the neoinstitutional perspective suggests that even ‘empty’ symbolism re-enacts and thereby substantiates the law’s cultural claims in ways that outright defiance would not.

Thus, investigations into the impact of regulative law on organizational activity suggest an ironic result: as a material deterrent, law is rarely sufficiently explicit, authoritative, and coercive to accomplish much beyond mere symbolism. As a cultural pronouncement, however, ‘mere symbolism’ can prove consequential—often extending a law’s practical reach (for better or worse) well beyond its official targets.

2.2.2 Regulative Law As Dependent Variable. Investigations into the reciprocal impact of organizational activity on regulative law reveal similarly complex patterns. At the most basic level, research confirms conventional wisdom: Organizations make substantial investments in electoral politics and backstage agenda-setting, and organizational actors occupy central positions on all sides of most policy networks. Contrary to many popular accounts, however, organizations often seem less interested in averting government ‘interference’ than in using regulation to stabilize markets or outmaneuver competitors. Legal incentives are easier to control than market prices, and as materialist accounts would predict, organizations invest heavily in securing this resource pool. These efforts extend well beyond formal lawmaking to encompass subsequent implementation activities as well. Legislative compromises can leave regulatory agencies with little substantive guidance and even less monetary support, and as a result, administrators often find themselves dependent on outside organizations for information, expertise, and even political cover. Far from imposing top-down social control, the resulting process of regulatory capture tends merely to institutionalize the indigenous practices of the regulated industry itself.

Culturalist accounts supplement this Machiavellian power-dependence analysis in two ways. First, organizational participation in the lawmaking process may reflect ideological concerns, as well as material interests. Professional and social movement organizations, in particular, often blend moral entrepreneurship with institutional entrepreneurship, to align the regulative environment with their own ethics and worldviews. Second, organizational and industrial culture may act as a ‘filtering agent’ between ‘law on the books’ and ‘law in action’ (Kidder 1983). Since popular understandings of legality come largely from mundane experiences in concrete settings, living law ultimately emerges not from legislatures or regulatory agencies but from real-world communities, where organizational beliefs and practices give form and content to otherwise vague legal principles. Indeed, many legal enactments are initially so ambiguous and contradictory as to do little more than signal that something in the regulative environment has changed—leaving the actual meaning of compliance to be constructed by subject organizations themselves, through an iterative process of interpretation, imitation, litigation, and reinterpretation (Edelman 1992).

This culturalist perspective suggests a somewhat less sinister view of regulatory capture. Both regulators and regulateds operate within the same institutional fields, and their shared exposure to a common set of filters and experiences can produce congruent outlooks even in the absence of quid pro quo power relations. Moreover, this dynamic can sometimes amplify, rather than dampen law’s regulative impact: The literature reveals several instances in which savvy lobbyists, lawyers, and personnel officers have actually exaggerated legal demands in order to increase their own symbolic and practical importance.

2.3 Law As A Typology Of Experience

As well as housing organizational interactions and imposing social control, law can also enter organizational life more subtly, as a definitional framework that identifies the legally acknowledged components of the social world and that explains their natures and attributes. The archetype of this ‘constitutive’ aspect of law is the doctrine of corporate personhood, which defines particular social groups as unitary collective actors with coherent legal identities, interests and capacities. Beyond incorporation, however, constitutive law also underpins virtually every other feature of the organizational world, from contracts and securities to intellectual property and employment. Unlike both facilitative and regulative law, constitutive law rarely catches the public eye, but its invisibility belies its agenda-setting power: By establishing fundamental background assumptions, legal definitions help to determine which types of organizations come into existence and which types of activity gain recognition. As a toolkit of basic templates and mechanisms, constitutive law often seems more placid and routine than its facilitative and regulative counterparts; in reality, though, this aspect of the legal environment provides the building blocks that underpin the other two.

2.3.1 Constitutive Law As Independent Variable. Because the materialist perspective emphasizes concrete conditions, it tends to downplay law’s constitutive aspects: the physical realities of organizational life should not depend on the presence or absence of legal descriptions—especially since economic actors can usually specify, by mutual agreement, anything that is not already defined by law. Nonetheless, hints of a materialist approach to constitutive law appear, at least embryonically, in certain writings from the transaction cost school. Masten (1990), for example, suggests that the fundamental distinction between markets and hierarchies lies in the different ‘default rules’ that govern these two types of economic activity. Although a carefully crafted network of market contracts could theoretically achieve the same results as a corporate charter, the ready-made template of incorporation presumably eases the cognitive burden of constructing such a relationship. Given that human beings are only boundedly rational, it follows that many organizations would never come into existence without this supportive legal definition. Constitutive law, then, can exert a substantial influence on the organizational world, simply by creating a basic framework of categories and rights (Campbell and Lindberg 1990, Dobbin and Sutton 1998).

Culturalist analyses go even further, seeing constitutive law not merely as a starting point for strategic negotiation, but as a fundamental preconscious framework for making sense of the social world. In this view, law plays a central role in the ‘social construction of reality,’ with legal definitions often becoming reified and institutionalized as taken-for-granted components of ‘the way the world works.’

Researchers have explored such constitutive dynamics in several aspects of organizational life, including inter-organizational relations, organizational structures, and the general cultural logic of ‘legal rationality.’ In the constitution of interorganizational relations, contract law establishes rituals for forming binding commitments, property law determines the appropriability of resources and ideas, tort law assigns responsibility for social misfortunes, and so on. In the constitution of organizational structures, law defines the characteristics of particular organizational features, such as affirmative action policies and ‘poison pill’ takeover defenses, and law also enunciates the ground-rules for entire organizational forms, such as private companies, public agencies, and nonprofit associations. Finally, in the constitution of legal rationality, law generates sympathetic vibrations in other kindred social structures, leading organizational embodiments of ‘fairness,’ ‘citizenship,’ and the like to mimic their legal counterparts.

2.3.2 Constitutive Law As Dependent Variable. In depicting legal definitions as the basic atoms of social structure, researchers from both the materialist and the culturalist camps tend to give short shrift to the study of constitutive law as a dependent variable. Nonetheless, legal categories, no matter how fundamental, are hardly facts of nature, and investigations into the relationship between organizations and the law have much to gain from examining how organizational activity may shape various constitutive constructs. The existing literature offers several thought-provoking suggestions. First, in Gilson’s (1984) memorable phrase, corporate lawyers may act as ‘transaction cost engineers,’ responding to unresolved governance challenges by assembling pre-existing constitutive building blocks into novel configurations. Over time, the resulting ‘legal devices’ can serve as prototypes for increasingly routine limitations —and these standardized reproductions can, in turn, provide the basis for revised legal categories (Powell 1993). Second, even without intentional innovation, organizations may inadvertently destabilize established legal definitions through imperfect implementation or unsuitable elaboration, generating legal pluralism and contradiction as an unintended consequence of everyday activity. Third, since legitimacy often stems from sheer numerical prevalence, organizations may skew the development of constitutive law just by disproportionately employing some legal alternatives rather than others. Finally, as described above, organizations may participate directly in creating and implementing new legislation, shaping the constitutive legal environment as advocates, as filtering agents, and simply as concrete ‘data points’ that give substance to the law’s abstract labels.

3. Future Directions

The study of organizations and the law has accomplished much in recent years; however, much still remains to be done. At a technical level, although both empirical and conceptual analyses abound, the former tend to focus on narrow policy concerns, while the latter tend to rest on meager evidentiary foundations. The challenge for future researchers will be to build firmer linkages between theory and data, and from those linkages, to develop a systematic body of intercomparable results. Cross-temporal and cross-cultural studies, in particular, seem essential to resolving the field’s persistent debates over causal sequences and material/cultural mechanisms.

As new research takes shape, investigators are likely to encounter many phenomena that bridge the three major aspects of law and that comingle material and cultural processes. Regulative statutes, for example, acquire meaning largely through the test cases that they generate in facilitative legal arenas—and the meaning thus acquired often includes clarification of constitutive legal definitions, and certification of ‘compliant’ legal devices (Edelman 1992). In such dynamics, cultural and material considerations presumably overlap, since most laws set forth norms and penalties simultaneously. Indeed, under certain circumstances, the material/cultural distinction can virtually disappear, as when material punishment becomes a symbol of societal commitment, or when cultural legitimacy becomes an asset in market competition (Suchman 1997).

In exploring such intersections, future research may accelerate a trend, already emerging among neo-institutionalists, toward conceptualizing the relation-ship between organizations and law less as a matter of unilateral causation than as a matter of endogenous coevolution: Given the inherent ambiguity of law on the books, the practical meaning of law in action develops only through a highly interactive process of social construction—involving both symbolic sense- making and concrete deal-making. This ‘structuration’ dynamic encompasses not only official agents of the legal system but also members of the focal organizational field, all tacitly collaborating to create simultaneously the forums and procedures of facilitative law, the demands and sanctions of regulative law, and the entities and devices of constitutive law. Eventually this collaboration may produce a working agreement on what the law ‘is’ and on what it ‘requires,’ and that agreement may then become institutionalized in for- mal conventions and taken-for-granted beliefs. But saying that legal rules ‘cause’ organizational practices (or vice versa) would be a gross oversimplification. Rather, rules and practices arise in tandem, as part of the consolidation of a single unified organizational legal field.


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