Economics of the Firm

Economics of the Firm focuses on the economic issues and problems related to business organization, management, and strategy. Issues and problems include: an explanation of why corporate firms emerge and exist; why they expand: horizontally, vertically and spacially; the role of entrepreneurs and entrepreneurship; the significance of organizational structure; the relationship of firms with

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Business Management: nature and scope

Business management (also known as business administration) is the administration of a commercial enterprise. It includes all aspects of overseeing and supervising business operations. From the point of view of management and leadership, it also covers fields that include office building administration, accounting, finance, designing, development, quality assurance, data analysis, sales, project management, information-technology management, research and development, and marketing. The administration of a business includes the performance or management of business operations and decision-making, as well as the

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The gains from the trade of the firm

1. PRODUCTION AND THE FIRM The firm is not an easy economic concept to define. Everyone accepts that IBM or ICI or Ford constitute ‘firms’, but from an economic as distinct from a purely legal point of view it is necessary to discover what underly­ing principles enable us to refer to such international giants

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Institutions and contract enforcement in the firm

1. The Exchange Game The firm as a method of enabling contractors to adjust to change and of encouraging the discovery of new possibilities for mutually advantageous cooperation will be a major theme running through this book. Alongside it there will be developed a different, though complementary, perspective. In section 2 we supposed that

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The process of exchange and the fim

All exchange transactions encounter problems of information and enforce­ment. Consider, for example, the process of building houses. Suppose that a person, A, who, for the sake of convenience, we shall call a ‘he’, wishes to build an extension to his home. One possibility is that he will draw up some plans, submit them to

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Contracts and information in the firm

Our fictional story of person A’s building project was designed to highlight some of the difficulties everyone encounters  at some time or other in the process of contracting. It is now necessary to look at the issues involved from a more analytical viewpoint. Perhaps the most important point about the hapless A is that

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Institutional responses to transactions costs of the firm

Information is costly to obtain. Finding out about the opportunities which are potentially available, about the quality of the goods and services on offer, and about the appropriate responses to various possible future con­tingencies, involves time and effort. The absence of information, as we have seen, can inhibit the process of exchange, but if

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Contrasting views of the entrepreneur

1. The Classical Tradition To summarise in a few lines the views of a range of writers spanning more than a century from the time of Adam Smith onwards is clearly a haz­ardous undertaking and one which is liable to result in severe distortions to the work of some economists. As a generalisation, however,

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The entrepreneur and the firm

We have now considered in some detail the contribution of those economic theorists who have given the entrepreneur a place of importance in their thinking. There are clearly many different conceptions of the entrepreneur, but complex and subtle as are some of the arguments and distinctions that we have encountered, a few fundamental points

Introduction of property rights: definition and types

1. INTRODUCTION In earlier chapters we have discussed at length the phenomenon of ‘exchange’, but until now it has simply been assumed that exchange takes place in goods or services (or in the x and y of our arithmetical example) and that these goods and services are valued because of some physical or technical

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The development of property rights

Thus far, our attention has primarily been confined to describing property rights and presenting a simple taxonomy. Several questions now arise. Can we explain the development of different types of property rights? How will the nature of a person’s rights influence behaviour? Do property rights matter? One possible response to these questions is that

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Team production and the classical capitalist firm

Just as the development of property rights in resources subject to conges­tion can be seen as an attempt to achieve efficiency gains, so the develop­ment of institutional structures such as firms can be viewed in the same light. In Chapter 2, the firm as a device to economise on transactions costs was considered in

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Alternative structures of property rights

In the last section we focused attention on the structure of property rights characteristic of the single proprietorship. Common observation tells us, however, that, numerous and economically important though such arrangements are (for example, Storey, 1982; Bolton, 1971), the modern economy has developed institutions of far greater complexity. An explana­tion of these more complex

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Property rights and managerial theories of the firm

By the early 1960s, the large professionally managed corporation was such a familiar part of the institutional landscape that it began to influence the thinking of economists about the firm. A series of ‘managerial’ models of the firm appeared during these years. They all had the same essential structure. Surpluses could be generated within

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Property rights and transactions cost approaches to the firm

1. ‘Ownership’ of the Firm The firm in transactions cost analysis is a ‘nexus of contracts’ as explored in Chapter 2. These ‘contracts’ represent promises between participants in the firm. The ability and incentive of the participants to fulfil their con­tractual obligations will depend upon their assignments of property rights. Within the firm, property

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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