Economics of the Firm – HKT Consultant

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 employees, providers of capital, customers, and government; and interactions between firms and the business environment.

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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

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’,

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

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

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

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

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

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.

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

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

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

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

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.

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

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

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

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

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,

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

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

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

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

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 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

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

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

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

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

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

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

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

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

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.

Capital structure and corporate governance of the firm

1. The Modigliani-Miller Theorem Throughout this chapter the agency problems of corporate control have been to the fore. Yet, although financial instruments such as ordinary

Hostile takeovers and economic eﬃciency

1. DEFENCES AGAINST HOSTILE TAKEOVERS 1.1. Supermajority Amendments If shareholders believe that the risk of takeover could have adverse consequences for the value of the

The takeover and capital structure of the firm

1. THE ENTREPRENEUR AND THE TAKEOVER Inherently, a joint-stock firm is neither concentrated nor dispersed in the structure of its shareholdings. No document or constitution

The managerial labour market and product market

1. THE MANAGERIAL LABOUR MARKET There are two different strands of thought in the literature on the managerial labour market, which are central to our

Monitoring managers in the firm

1. Do Shareholders Monitor Managers? The analysis of section 4 applied to the standard case in which the effort of the agent was ‘unobservable’. Could

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,

Evolution and economic organization

1. THE VARIETY OF THEORETICAL APPROACHES Over the last ten to twenty years, institutional change has proceeded at a rapid pace in many countries. The

Examples of non-proﬁt enterprise

The following four subsections offer a short discussion of non-profit enterprise in particular areas from the perspective of the theory of contract failure. 1. Hospitals

Non-proﬁt and charitable enterprise

1. THE NON-PROFIT ENTERPRISE Institutions which cannot distribute residual profits and issue no exchangeable or non-exchangeable claims to profits are non-profit enterprises. Nonprofit enterprises have

Mutual enterprise and Stakeholding

1. MUTUAL ENTERPRISE Where people form a ‘club’ to provide various forms of financial protection, we refer to ‘mutual enterprise’.29 Mutuals have played an important

The retail cooperative, Marketing and supply cooperatives

1. THE RETAIL COOPERATIVE 1.1. Transactions Costs and the Retail Cooperative Where consumers are poorly informed about the quality and reliability of the goods offered

The labour–capital partnership and te role of peer pressure

1. THE LABOUR-CAPITAL PARTNERSHIP Sections 4 and 5 have been concerned with the difficulties faced by cooperative and profit-sharing enterprises when confronting investment and employment

The contractual incompleteness and principal–agent problem in the firm

1. PROFIT SHARING AND CONTRACTUAL INCOMPLETENESS As has been emphasised on frequent occasions, information costs and bounded rationality mean that real world contracts are not

Principal–Agent theory of the firm

1. RESIDUAL CLAIMS AND ENTERPRISE GOVERNANCE The joint-stock corporation is an immensely important institutional form, but it is not ubiquitous, and, as Chapters 8 and

Corporate governance – bank versus market systems

1. The United Kingdom and the United States In his study of financial systems, Berglof (1990) argues that there are essentially two models of corporate

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