Alchian/Demsetz

Question 1

What characterizes firms?

Answer 1

Not authority to coordinate by fiat.

Question 2

Firms/entrepreneurs/managers do not

Answer 2

own all of their inputs – particularly human capital.

Question 3

They must provide incentives such

Answer 3

that this capital is used efficiently in production.

Question 4

Providing incentives is done through

Answer 4

contracts, just as it is between individuals and firms in what we normally consider market transactions.

Question 5

A&D argue that

Answer 5

“the absence of the price mechanism/presence of director of inputs” is not what firms are about.

Question 6

Firms are

Answer 6

organizational forms characterized by the team use of inputs plus the centralized position of some party in the contractual arrangements of all other inputs.

- Manager/entrepreneur contracts for, not directs, inputs.
- Market mechanisms at work within firms.

Question 7

Relationship to Coase

Answer 7

• Can be interpreted as extension.
• Change “cost of using the price mechanism” v. “cost of contracting through markets” to “cost of contracting through this particular class of institutions”

Question 8

xplain why contracting through this class of institutions might be less expensive, and under what circumstances we would expect it to be so.

Answer 8

Answer: shirking, shared inputs (non-separabilities)

Question 9

When production is more efficient with shared inputs than non-shared ones,

Answer 9

it may be more efficient to establish sets of agreements that characterize firms than to govern these transactions using other institutional situations: for example, markets.

Question 10

Examples of: “Team use of inputs”

Answer 10

Capital of assembly line used by each of the line workers.
    Computer networks (internal) used by employees to communicate.
    Reputation: an asset that can be drawn up or down by individuals.

Question 11

Examples of “centralized position of some party in contractual arrangements”

Answer 11

• monitor/supervisor/entrepreneur
  
  • dean of university
  • general manager/coach/owner of firm

Question 12

In some cases, shared use of inputs is more efficient than non-shared use.

Answer 12

Teams of consultants.

Collaboration on group projects in class.

Question 13

The Metering Problem:

Answer 13

suppose individual output is extremely difficult or impossible to directly observe: only collective output can be.

Question 14

Incentive problem:

Answer 14

benefits from effort are shared by the whole group, but costs are borne individually

This gives rise to shirking, unless individuals within group can costlessly detect and punish.

Question 15

Individual contracts among individuals in this case can be extremely costly.

Answer 15

Each bears cost of monitoring and constructing and enforcing contracts.
Each spends even less time producing output, and individuals still shirk some.
Still might be better than non-shared inputs, but may not be the most efficient institutional arrangement.

Question 16

external competition to deter shirking

Answer 16

outsiders bidding to replace shirkers (lower share)

But how can they tell who is shirking? And won’t they shirk just as much when they are employed? They face similar incentives.

Question 17

hire a monitoring specialist.

Answer 17

allow them to contract directly with each input, right to terminate, renegotiate contracts – a right which those not party to these contracts don’t have, let them sell their right in the market.

**need to be able to infer individual productivities from observables reasonably well (although this need not be verifiable) – otherwise there will not be efficiency improvements.

Question 18

Who monitors the monitor?

Answer 18

The market, if the monitor is the residual claimant – reaps the marginal benefits from increased productivity.

Question 19

Ownership arises from

Answer 19

role as monitor! (We might think the direction of causation is the other way around…)

Question 20

Efficiency gains

Answer 20

benefit all of those in the organization.

Question 21

Attributes of Classical Firm

Answer 21

Attributes:

hierarchy,
owner/manager duties and rights,
incentives and compensation scheme of firm and workers.

A&D argue that these will arise as a consequence of arranging an efficient contracting structure in cases where shared/team use of inputs increases productivity.