Entrepreneurship and property rights

1. ‘Ownership’ and the Entrepreneur Property rights theory as developed by Grossman, Hart and others in recent years is in the neoclassical tradition of analysis. It assumes rational utility-maximising behaviour in the presence of a known set of constraints. It is not Walrasian in the sense described in Chapter 1, with its assumption of

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Principal and agent in the firm

1. INTRODUCTION In chapters 1 to 4, attention has been focused on the difficulties inherent in formulating agreements which permit specialisation and exchange to occur, when information is not ‘public’; that is, costlessly and equally available to everyone. Specialisation permits people to concentrate on those tasks in which they have a comparative advantage (Chapter

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Examples of incentive contracts in the firm

The principles which have been outlined in the first five sections of this chapter have applications which are more wide ranging than the share­cropping case which we have thus far been using for illustrative purposes. Harris and Raviv (1978) provide a number of interesting examples. 1. Health and Motor Insurance Moral hazard in insurance

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Monitoring the effort of team members in the firrm

In the light of the above, the individual employer under conditions of team production must therefore rely on monitoring to induce effort. We have already surmised in Chapter 4 that the proprietorship will be viable only if the returns to monitoring are ‘sufficiently great’. Again, to reinterpret this observation in the light of the

Incentive contracts and the firm

In this chapter our primary task has been to consider in some detail the contractual problems which face two parties when outcomes are uncertain, and when information cannot be observed or is costly to observe and subject to error. It is appropriate at this point to discuss explicitly the significance for the theory of

Piece-rates and time-rates in the firm

1. Payment Schedules, Moral Hazard and Effort Although employment contracts were discussed at various points in Chapter 5, it will be useful to reinterpret some of the principal-agent results in terms of more conventional concepts. Our analysis thus far has been conducted with the aid of a simple box diagram, with each point in

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Contracts and adverse selection in the firm

1.  MONITORING AND MORAL HAZARD Monitoring is a response to the problem of ‘moral hazard’. Because people, by assumption, cannot be relied upon to keep a promise to exert effort e, ‘direct incentives’ via piece-rates are required to ensure compli­ance. The risk-sharing losses involved are the result of moral hazard, but they may be

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Problem of moral hazard in the firm

1. MONITORING AND ADVERSE SELECTION Monitoring may also be required to cope with a quite separate problem; that of ‘adverse selection’. A simple model of adverse selection has already been considered in section 2.2. Here the analysis is extended to incorporate risk aversion, while the contractors are assumed to vary in the cost of

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The rank-order tournament in the firm

1. Incentives and the Structure of a Tournament This suggestion that a proportion of the workforce be offered a ‘prize’ (pro­motion) is an application of the incentive structure underlying the rank­order tournament. In a tournament, compensation is based not on the absolute level of individual output, but simply on the rank order of con­testants.

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Idiosyncratic exchange, rent seeking, entrepreneurship and opportunism

1. IDIOSYNCRATIC EXCHANGE The analysis of sections 3 to 6 helps us to rationalise some of the charac­teristics of hierarchical structures. Even in the context of identical employ­ees performing identical tasks it is possible to understand the development of recognisable hierarchies. We have seen that the provision of effort incen­tives where individual output cannot

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The firm as a governance structure

1. The Internal Labour Market A description of the major ‘contracting modes’ (the spot contract, the state-contingent contract and the authority relation) has already been pre­sented at the end of Chapter 2, along with a brief outline of Williamson’s criticism of these modes. Bounded rationality and opportunistic behaviour deriving from task idiosyncrasy, he argues,

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The Japanese firm

The ideas introduced in this chapter have recently been widely discussed in the context of the contrast between hierarchical structures in Japan and those in the United States and other Western countries. We cannot offer a survey of what is now a very large literature.33 However, even a cursory sketch reveals how closely the

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The variety of business enterprise

The firm investigated in Chapter 6 was beginning to take on some of the characteristics of hierarchical organisations and to reflect a few of the structural features associated with modern business enterprise, but our dis­cussion of internal structure is hardly complete. We have presented various attempts at rationalising employment hierarchies, yet many other charac­teristics

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Strategy and structure of the firm

The degree of vertical, lateral, conglomerate or international integration reflects the firm’s strategic development. Another important feature of the firm is its internal administrative structure. In Chapter 6, we investigated the incentive properties of simple hierarchies, but we did not consider in what ways administrative systems might differ and whether any differences between firms

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Visible and invisible hands governing the firm

1. The Boundary of the Firm From sections 1 and 2 of this chapter we have seen that the ‘visible hand’ can guide the process of resource allocation and integrate vertical, lateral, conglomerate or international transactions using a variety of corporate structures. As has been remarked in earlier chapters, however, the distinc­tion between visible

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Integration, complexity and environmental uncertainty

After reviewing the literature on corporate strategy and structure, Caves (1980) remarks that much of it seems implicitly to be concerned with the concept of an ‘organisational production function’. The ‘inputs’ into this function, he argues, are resources devoted to collecting and analysing infor­mation and coordinating other factors of production. The ‘output’ is the

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Integration, internalisation and market failure

In this section, we consider integration in the context of market failure. The analysis runs parallel to that of Chapter 6 on the policing of labour con­tracts, but here the emphasis is on the problem of contracting with buyers or suppliers of non-labour inputs. Integration as a means of overcoming transactional hazards is sometimes

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Integration and innovation of the firm

The ideas of Goldberg and others on the role of long-term commitments in coping with specific capital investments in the context of technical change lead naturally to an appraisal of the firm as a device for initiating change. In subsection 4, our attention was focused on flexibility and adapt­ability in the face of an

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Corporate governance and managerial control of the firm

1. WHO CONTROLS THE JOINT-STOCK FIRM? The firm, according to the paradigm that we are exploring in this book, is a nexus of contracts. These contracts establish an allocation of property rights among the individuals who comprise the firm. They may include rights to monitor, to administer resources, to receive income flows, to hire

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Managerial incentive contracts in the firm

1. Managerial Incentives and the Theory of Principal and Agent When the provider of capital appoints a manager to decide how it should be used, an agency problem arises. In Chapter 5, it was seen that the nature of a contract between principal and agent will depend upon what can be observed, by whom,

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