Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure
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Law, Economics, and the Theory of the Firm
Buffalo Law Review Volume 52 Number 3 Article 8 7-1-2004 Law, Economics, and the Theory of the Firm Michael J. Meurer Boston University School of Law Follow this and additional works at: https://digitalcommons.law.buffalo.edu/buffalolawreview Part of the Law Commons, and the Legal Theory Commons Recommended Citation Michael J. Meurer, Law, Economics, and the Theory of the Firm, 52 Buff. L. Rev. 727 (2004). Available at: https://digitalcommons.law.buffalo.edu/buffalolawreview/vol52/iss3/8 This Essay is brought to you for free and open access by the Law Journals at Digital Commons @ University at Buffalo School of Law. It has been accepted for inclusion in Buffalo Law Review by an authorized editor of Digital Commons @ University at Buffalo School of Law. For more information, please contact [email protected]. Law, Economics, and the Theory of the Firm MICHAEL J. MEURERt Economic analysis of the law assumes the "shadow of the law" influences the behavior of businesses. Thus, busi- ness people consider the costs and benefits of contract litigation when they make decisions about contract per- formance, they consider the costs of tort litigation when they make investments in safety, they consider the costs of violating a regulation when they make decisions about regulatory compliance, and so on. Economic models of law typically abstract from organizational detail and treat busi- nesses as if they are represented by a single manager who controls the firm's behavior and acts to maximize its profit. This abstraction simplifies analysis but, not surprisingly, it limits the ability of analysts to fully explore some important legal policy questions. -
Ten Theses on the Firm As a Democratic Institution Anna Grandori, Bocconi University, Milan
∗ Ten theses on the firm as a democratic institution Anna Grandori, Bocconi University, Milan Abstract The paper contributes to revising the notion of the firm by a) reconstructing the conditions in which a firm-like entity may be necessary for conducting economic action; b) showing that such an entity can be established by an agreement or contract associating and dedicating partners and/or assets (in most Civil Law countries called a contract of ‘societas’); and c) arguing that such an entity, as any legally recognized association, in modern constitutional democratic legal orders, is bound to be governed according to democratic principles and procedures. Different types of firms differ according to who are the principals in the democracy, and whether the ‘societas’ is a society of assets or of people. Those theses allow to derive some other relevant implications of the nature and governance of the firm (for example, the irrelevance of the objectives pursued, and the relevance of responsibility toward third parties, for defining a firm). The whole set of propositions is exposed in ‘ten theses’. Introduction The starting question of our analysis is, so to speak, a ‘zero-based analysis’ question : When and why the constitution of an entity, such as the firm, is necessary for undertaking economic action, i.e. other ways of associating or transacting fall short from providing adequate support? What is the ‘glue’ that can bring and keep different actors together in such an entity, i.e. what is the ‘relation’ between individuals/primary groups with such an organization? Those questions lies at the core of organization theory and organizational economics ever since, and received various responses. -
The Theory of the Firm and the Theory of the International Economic Organization: Toward Comparative Institutional Analysis Joel P
Northwestern Journal of International Law & Business Volume 17 Issue 1 Winter Winter 1997 The Theory of the Firm and the Theory of the International Economic Organization: Toward Comparative Institutional Analysis Joel P. Trachtman Follow this and additional works at: http://scholarlycommons.law.northwestern.edu/njilb Part of the International Trade Commons Recommended Citation Joel P. Trachtman, The Theory of the Firm and the Theory of the International Economic Organization: Toward Comparative Institutional Analysis, 17 Nw. J. Int'l L. & Bus. 470 (1996-1997) This Symposium is brought to you for free and open access by Northwestern University School of Law Scholarly Commons. It has been accepted for inclusion in Northwestern Journal of International Law & Business by an authorized administrator of Northwestern University School of Law Scholarly Commons. The Theory of the Firm and the Theory of the International Economic Organization: Toward Comparative Institutional Analysis Joel P. Trachtman* Without a theory they had nothing to pass on except a mass of descriptive material waiting for a theory, or a fire. 1 While the kind of close comparative institutional analysis which Coase called for in The Nature of the Firm was once completely outside the universe of mainstream econo- mists, and remains still a foreign, if potentially productive enterrise for many, close com- parative analysis of institutions is home turf for law professors. Hierarchical arrangements are being examined by economic theorists studying the or- ganization of firms, but for less cosmic purposes than would be served3 by political and economic organization of the production of international public goods. I. INTRODUCrION: THE PROBLEM Debates regarding the competences and governance of interna- tional economic organizations such as the World Trade Organization * Associate Professor of International Law, The Fletcher School of Law and Diplomacy, Tufts University. -
Portfolio Diversification, Market Power, and the Theory of the Firm
Working Paper WP-1170-E March, 2017 PORTFOLIO DIVERSIFICATION, MARKET POWER, AND THE THEORY OF THE FIRM José Azar IESE Business School – University of Navarra Av. Pearson, 21 – 08034 Barcelona, Spain. Phone: (+34) 93 253 42 00 Fax: (+34) 93 253 43 43 Camino del Cerro del Águila, 3 (Ctra. de Castilla, km 5,180) – 28023 Madrid, Spain. Phone: (+34) 91 357 08 09 Fax: (+34) 91 357 29 13 Copyright © 2017 IESE Business School. IESE Business School-University of Navarra - 1 The Public-Private Sector Research Center is a Research Center based at IESE Business School. Its mission is to develop research that analyzes the relationships between the private and public sectors primarily in the following areas: regulation and competition, innovation, regional economy and industrial politics and health economics. Research results are disseminated through publications, conferences and colloquia. These activities are aimed to foster cooperation between the private sector and public administrations, as well as the exchange of ideas and initiatives. The sponsors of the Public-Private Sector Research Center are the following: Ajuntament de Barcelona Departament d’ Economia i Coneixement de la Generalitat de Catalunya Departament d’ Empresa i Ocupació de la Generalitat de Catalunya Diputació de Barcelona EVERIS Fundació AGBAR Institut Català de les Empreses Culturals (ICEC) PricewaterhouseCoopers Sanofi The contents of this publication reflect the conclusions and findings of the individual authors and not the opinions of the Center's sponsors. IESE Business School-University of Navarra Portfolio Diversification, Market Power, and the Theory of the Firm José Azar∗ January 30, 2017 Abstract This paper develops a model of firm behavior in the context of oligopoly and port- folio diversification by shareholders. -
Multinational Corporations and Transaction Costs
A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Todorova, Tamara Book — Published Version Multinational Corporations and Transaction Costs Suggested Citation: Todorova, Tamara (2020) : Multinational Corporations and Transaction Costs, ISBN 978-605-7736-99-4, KSP Books, Istanbul, http://books.ksplibrary.org/978-605-7736-99-4/ This Version is available at: http://hdl.handle.net/10419/222987 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle You are not to copy documents for public or commercial Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich purposes, to exhibit the documents publicly, to make them machen, vertreiben oder anderweitig nutzen. publicly available on the internet, or to distribute or otherwise use the documents in public. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, If the documents have been made available under an Open gelten abweichend von diesen Nutzungsbedingungen die in der dort Content Licence (especially Creative Commons Licences), you genannten Lizenz gewährten Nutzungsrechte. may exercise further usage rights as specified in the indicated licence. http://creativecommons.org/licenses/by-nc/4.0/ -
Encyclopedia of Law & Economics
5610 THE THEORY OF THE FIRM Nicolai J. Foss Department of Industrial Economics and Strategy Copenhagen Business School Henrik Lando Department of Finance Copenhagen Business School Steen Thomsen Institute of International Business Aarhus Business School © Copyright 1999 Nicolai J. Foss, Henrik Lando, and Steen Thomsen Abstract This chapter is a survey of modern theories of the firm. We categorize these as belonging either to the principal-agent or the incomplete contracting approach. In the former category fall, for example, the Alchian and Demsetz moral hazard in teams theory as well as Holmstrøm and Milgrom’s theory of the firm as an incentive system. Belonging to the incomplete contracting branch are theories that stress the importance of the employment relationship (for example, Coase and Simon) as an adaptation mechanism, theories that stress the importance of ownership of assets for affecting incentives when contracts must be renegotiated (Williamson, Grossman and Hart, Hart and Moore), and some recent work on implicit contracts (Baker, Gibbons and Murphy). We argue that these different perspectives on the firm should be viewed as complementary rather than as mutually exclusive and that a synthesis seems to be emerging. JEL classification: K22, L22 Keywords: Principal-Agent Problems, Incomplete Contracts, Moral Hazard, Employment Relationship, Firm Ownership, Renegotiation 1. Introduction: The Emergence of the Theory of the Firm Along with households, firms have for a long time been a crucial part of the explanatory set-up of economics. For example, in basic price theory, firms are part of the apparatus that helps us trace out the effect on endogenous variables of changes in exogenous variables. -
The Theory of the Firm, the Theory of Competition and the Transnational Corporation Janis Kapler University of Massachusetts Boston, [email protected]
University of Massachusetts Boston ScholarWorks at UMass Boston Economics Faculty Publication Series Economics 1-1-2006 The Theory of the Firm, the Theory of Competition and the Transnational Corporation Janis Kapler University of Massachusetts Boston, [email protected] Follow this and additional works at: http://scholarworks.umb.edu/econ_faculty_pubs Part of the Labor Economics Commons Recommended Citation Kapler, Janis, "The Theory of the Firm, the Theory of Competition and the Transnational Corporation" (2006). Economics Faculty Publication Series. Paper 7. http://scholarworks.umb.edu/econ_faculty_pubs/7 This Occasional Paper is brought to you for free and open access by the Economics at ScholarWorks at UMass Boston. It has been accepted for inclusion in Economics Faculty Publication Series by an authorized administrator of ScholarWorks at UMass Boston. For more information, please contact [email protected]. 1 THE THEORY OF THE FIRM, THE THEORY OF COMPETITION, AND THE TRANSNATIONAL CORPORATION Working paper, 9/06 J. K. Kapler, Associate Professor University of Massachusetts at Boston Department of Economics 100 Morrissey Boulevard Boston, MA 02125-3393 (phone) 617-287-6955 (fax) 617-287-6976 [email protected] 2 ABSTRACT The Theory of the Firm, The Theory of Competition, and The Transnational Corporation (TNC) JEL F23 Coase’s 1937 paper on “The Nature of the Firm” formed the basis of the transaction-cost and internalization theories of transnational enterprises in the 1970s-1990s. These emphasized the problem of firms transferring intangible assets across national borders. Newer theories of the firm adopt resource- based Penrosian, knowledge-based, capabilities and evolutionary perspectives, yet most continue to explain the international firm as a function of transaction-cost economizing. -
The Essential RONALD COASE
The Essential RONALD COASE by L. Lynne Kiesling Fraser Institute d www.fraserinstitute.org The Essential Ronald Coase by L. Lynne Kiesling Fraser Institute www.fraserinstitute.org 2021 www.fraserinstitute.org d Fraser Institute d iii Copyright © 2021 by the Fraser Institute. All rights reserved. No part of this book may be reproduced in any manner whatsoever without written permission except in the case of brief quotations embodied in critical articles and reviews. The author of this publication has worked independently and opinions expressed by her are, therefore, her own, and do not necessarily reflect the opinions of the Fraser Institute or its supporters, directors, or staff. This publication in no way implies that the Fraser Institute, its directors, or staff are in favour of, or oppose the passage of, any bill; or that they support or oppose any particular political party or candidate. Printed and bound in Canada Cover design and artwork Bill C. Ray ISBN 978-0-88975-644-1 Contents Introduction / 1 1 Institutions, Property Rights, and Transaction Costs / 5 2 Why Do Firms Exist? / 9 3 Resolving Disputes: The Problem of Social Cost / 19 4 Applied Transaction Cost Economics: Spectrum Allocation / 27 5 Applied Transaction Cost Economics: Emission Permit Trading / 33 6 Coase and the Lighthouse in Economics / 41 7 Problems of Monopoly / 45 8 Conclusion / 53 Works Cited and Suggestions for Further Reading / 55 Publishing information / 61 Author’s acknowledgments / 62 About the author / 62 Publisher’s acknowledgments / 62 Supporting the Fraser Institute / 63 Purpose, funding, and independence / 63 About the Fraser Institute / 64 Editorial Advisory Board / 65 Fraser Institute d www.fraserinstitute.org Introduction: Who Was Ronald Coase? Ronald Coase was one of the most influential economists of the 20th century, and one of the most unusual. -
Towards a Political Theory of the Firm
NBER WORKING PAPER SERIES TOWARDS A POLITICAL THEORY OF THE FIRM Luigi Zingales Working Paper 23593 http://www.nber.org/papers/w23593 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 July 2017 I thank Mark Gertler, Gordon Hanson, Enrico Moretti, Tim Taylor for very useful comments and Steve Haber for educating me on the multiple ways in which Google lobbies. Financial support from the Stigler Center and from the George Rinder Research fund at the University of Chicago is gratefully acknowledged. The views expressed herein are those of the author and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications. © 2017 by Luigi Zingales. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source. Towards a Political Theory of the Firm Luigi Zingales NBER Working Paper No. 23593 July 2017 JEL No. G3 ABSTRACT Neoclassical theory assumes that firms have no power of fiat any different from ordinary market contracting, thus a fortiori no power to influence the rules of the game. In the real world, firms have such power. I argue that the more firms have market power, the more they have both the ability and the need to gain political power. Thus, market concentration can easily lead to a “Medici vicious circle,” where money is used to get political power and political power is used to make money. -
Fallacies in the Interpretation of the Externality Problem
FALLACIES IN THE ECONOMIC DOCTRINE OF EXTERNALITIES Harold Demsetz, Professor Emeritus, UCLA (This draft: 7/19/2010; First draft: 9/29/2009) This essay refutes contemporary doctrine toward externalities and offers a different view, one that is much narrower in application, of what we now call the externality problem. Discussion of externalities has continued for almost 100 years. I do not trace the details of this long history but, instead, focus on the two major turning points that shape current doctrine. These are The Economics of Welfare (1920) by A. C. Pigou and ‘The Problem of Social Cost’ (1960) by R. H. Coase. Contemporary doctrine seems to have settled into a state of quiet toleration of the different views offered by these two works, at least as compared to the heated debates during the years that followed immediately on the appearance of Coase’s paper. The present essay is intended to disrupt this quietude, for I am convinced that Pigou, Coase, and, more generally, the economics profession view this problem wrongly. The present essay contains three parts, a prefatory note intended to clear away potential confusions, a refutation of Pigou’s and Coase’s views, and a suggested alternative to these.1 I. Prefatory note. The 18th century debate between mercantilists and Scottish philosophers came to an important juncture in 1776 with publication of Adam Smith’s inquiry into The Wealth of Nations. Smith’s contributions to the emerging new discipline of economics were multifaceted and far reaching, but the contribution most relevant to this debate was his argued claim that a competitive, private ownership economy in which persons acted freely to improve their own interests could, and would, serve public interests. -
Articles Reconceptualizing the Theory of the Firm
Articles Reconceptualizing the Theory of the Firm— From Nature to Function Martin Petrin* Abstract What is the “firm”? This Article revisits and explores the theory of the firm and corporate personhood and shows how the century-old discourse in this area still firmly shapes how scholars, judges, and legislatures treat legal entities in corporate law, constitutional law, tort law, and criminal law, causing unnecessary complications and flawed outcomes. Traditionally, the firm is characterized as a real entity, a fiction, or an aggregate. Conversely, this Article proposes a novel answer to the perennial question as to how to conceptualize the firm. The new approach refocuses the debate away from the nature of the firm and contends that explanations of the firm should focus instead on its economic and social function, purpose, and effects. It also argues that compared to current approaches, a purely functional approach, as * Assistant Professor, University College London, Faculty of Laws; S.J.D. (UCLA); LL.M. (Columbia). The author wishes to thank Daniel Attenborough, Barnali Choudhury, Martin Gelter, Peter Oh, Stefan Padfield, Elizabeth Pollman, and the participants of the Leicester Legal Research Forum for their helpful comments. Errors remain my own. This Article has been selected for presentation at the Harvard-Stanford International Junior Faculty Forum 2014. 1 2 PENN STATE LAW REVIEW [Vol. 118:1 developed in greater detail in the Article, provides a more useful analytical framework to ascertain what rights and duties corporations and other legal entities should have. Table of Contents I. INTRODUCTION ...........................................................................................2 II. HISTORICAL ORIGINS AND DEVELOPMENT .................................................4 A. The German Debate on the Nature of Legal Entities ........................5 1. -
An Economist's Perspective on the Theory of the Firm Author(S): Oliver Hart Source: Columbia Law Review, Vol
An Economist's Perspective on the Theory of the Firm Author(s): Oliver Hart Source: Columbia Law Review, Vol. 89, No. 7, Contractual Freedom in Corporate Law (Nov., 1989), pp. 1757-1774 Published by: Columbia Law Review Association, Inc. Stable URL: http://www.jstor.org/stable/1122818 Accessed: 24/08/2008 12:44 Your use of the JSTOR archive indicates your acceptance of JSTOR's Terms and Conditions of Use, available at http://www.jstor.org/page/info/about/policies/terms.jsp. JSTOR's Terms and Conditions of Use provides, in part, that unless you have obtained prior permission, you may not download an entire issue of a journal or multiple copies of articles, and you may use content in the JSTOR archive only for your personal, non-commercial use. Please contact the publisher regarding any further use of this work. Publisher contact information may be obtained at http://www.jstor.org/action/showPublisher?publisherCode=clra. Each copy of any part of a JSTOR transmission must contain the same copyright notice that appears on the screen or printed page of such transmission. JSTOR is a not-for-profit organization founded in 1995 to build trusted digital archives for scholarship. We work with the scholarly community to preserve their work and the materials they rely upon, and to build a common research platform that promotes the discovery and use of these resources. For more information about JSTOR, please contact [email protected]. http://www.jstor.org AN ECONOMIST'S PERSPECTIVE ON THE THEORY OF THE FIRM OliverHart* An outsider to the field of economics would probably take it for granted that economists have a highly developed theory of the firm.