When many individuals combine their inputs in production, common property problems arise. Often the use of low incentive wage contracts are necessary to mitigate overuse. However, such contracts mean that workers need direction from others. This is the seed of an organization. The central person in an organization must be able to bare the risks of their decisions, and so the owner of the organization is often the holder of the equity capital, which is used to convince others that they will not bear negative residuals.

There are many notions of property rights. The critical concept in this book is an Economic Property Right, which is defined as an individuals ability in expected terms to exercise a choice with respect to a commondity. Such rights depend on the individuals legal and moral rights to that commodity. Such rights are complicated because they might be spread out across different subsets of a commoditys attributes, and different people might hold different types of rights to the commodity. Furthermore, the strength of any given property right can vary and is under the choice of various people.