The Nature of the Firm


The Nature of the Firm

'The Nature of the Firm' (1937) 4(16) Economica 386–405, is an influential article by Ronald Coase. It offered an economic explanation of why individuals choose to form partnerships, companies and other business entities rather than trading bilaterally through contracts on a market.

Contents

Summary

Given that "production could be carried on without any organization that is, firms at all", Coase asks, why and under what conditions should we expect firms to emerge? Since modern firms can only emerge when an entrepreneur of some sort begins to hire people, Coase's analysis proceeds by considering the conditions under which it makes sense for an entrepreneur to seek hired help instead of contracting out for some particular task.

The traditional economic theory of the time suggested that, because the market is "efficient" (that is, those who are best at providing each good or service most cheaply are already doing so), it should always be cheaper to contract out than to hire.

Coase noted, however, that there are a number of transaction costs to using the market; the cost of obtaining a good or service via the market is actually more than just the price of the good. Other costs, including search and information costs, bargaining costs, keeping trade secrets, and policing and enforcement costs, can all potentially add to the cost of procuring something via the market. This suggests that firms will arise when they can arrange to produce what they need internally and somehow avoid these costs.

There is a natural limit to what can be produced internally, however. Coase notices "decreasing returns to the entrepreneur function", including increasing overhead costs and increasing propensity for an overwhelmed manager to make mistakes in resource allocation. This is a countervailing cost to the use of the firm.

Coase argues that the size of a firm (as measured by how many contractual relations are "internal" to the firm and how many "external") is a result of finding an optimal balance between the competing tendencies of the costs outlined above. In general, making the firm larger will initially be advantageous, but the decreasing returns indicated above will eventually kick in, preventing the firm from growing indefinitely.

Other things being equal, a firm will tend to be larger:

  • the less the costs of organizing and the slower these costs rise with an increase in the transactions organized.
  • the less likely the entrepreneur is to make mistakes and the smaller the increase in mistakes with an increase in the transactions organized.
  • the greater the lowering (or the less the rise) in the supply price of factors of production to firms of larger size.

The first two costs will increase with the spatial distribution of the transactions organized and the dissimilarity of the transactions. This explains why firms tend to either be in different geographic locations or to perform different functions. Additionally, technology changes that mitigate the cost of organizing transactions across space will cause firms to be larger—the advent of the telephone and cheap air travel, for example, would be expected to increase the size of firms. On a related note the use of the internet and related modern information and communication technologies seem to lead to the existence of so called virtual organizations.

Coase does not consider non-contractual relationships, as between friends or family.

See also

Notes

Access full article for free http://onlinelibrary.wiley.com/doi/10.1111/j.1468-0335.1937.tb00002.x/full

External links



Wikimedia Foundation. 2010.

Look at other dictionaries:

  • The Album (The Firm album) — The Album Studio album by The Firm Released October 21, 1997 …   Wikipedia

  • The Firm — ist der Name einer kurzlebigen englischen Rockband um Jimmy Page und Paul Rodgers, siehe The Firm (Rockband) der Name einer Comedy Popband aus England, siehe The Firm (Popband) der Name eines einmaligen Hip Hop Projekt, siehe Nas, Foxy Brown, AZ …   Deutsch Wikipedia

  • The Firm (grupo) — The Firm Datos generales Origen New York, New York, ( Estados Unidos) …   Wikipedia Español

  • The Firm (téléfilm) — The Firm est un téléfilm réalisé par Alan Clarke en 1988 et écrit par Al Ashton. Le film est inspiré des activités de l Inter City Firm, une organisation de hooligans du club de football de West Ham United pendant les années 1970 80, bien que le… …   Wikipédia en Français

  • The Firm : The Album — Nas, Foxy Brown, AZ, and Nature Present The Firm: The Album Nas Escobar, Foxy Brown, AZ, and Nature Present The Firm: The Album Album par The Firm Sortie 21 octobre 1997 Enregistrement Novembre 1996–Aout 1997 Durée 53:04 Genre(s) …   Wikipédia en Français

  • The Firm (1988 film) — Infobox Film name = The Firm director = Alan Clarke producer = David M. Thompson writer = Al Ashton (as Al Hunter) starring = Gary Oldman Lesley Manville Phil Davis Charles Lawson music = cinematography = Ben Philpott Richard Philpott John Ward… …   Wikipedia

  • The Firm —  Cette page d’homonymie répertorie les différentes œuvres portant le même titre. The Firm est un groupe de rock britannique formé en 1984. The Firm est un téléfilm britannique avec Gary Oldman (1988). The Firm (La Firme en français) est un… …   Wikipédia en Français

  • The Firm (1993 film) — This article is about the 1993 film. For the 1988 film of the same name, see The Firm (1988 film) Infobox Film | name = The Firm caption = The Firm promotional movie poster director = Sydney Pollack producer = John Davis Sydney Pollack Scott… …   Wikipedia

  • Theory of the firm — The theory of the firm consists of a number of economic theories that describe the nature of the firm, company, or corporation, including its existence, behavior, structure, and relationship to the market.[1] Contents 1 Overview 2 Background …   Wikipedia

  • Nas, Foxy Brown, AZ, and Nature Present The Firm: The Album — The Album Studioalbum von The Firm Veröffentlichung 21. Oktober 1997 Label Aftermath Interscope …   Deutsch Wikipedia


Share the article and excerpts

Direct link
Do a right-click on the link above
and select “Copy Link”

We are using cookies for the best presentation of our site. Continuing to use this site, you agree with this.