Alchian/Demsetz Flashcards
What characterizes firms?
Not authority to coordinate by fiat.
Firms/entrepreneurs/managers do not
own all of their inputs – particularly human capital.
They must provide incentives such
that this capital is used efficiently in production.
Providing incentives is done through
contracts, just as it is between individuals and firms in what we normally consider market transactions.
A&D argue that
“the absence of the price mechanism/presence of director of inputs” is not what firms are about.
Firms are
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.
Relationship to Coase
- 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”
xplain why contracting through this class of institutions might be less expensive, and under what circumstances we would expect it to be so.
Answer: shirking, shared inputs (non-separabilities)
When production is more efficient with shared inputs than non-shared ones,
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.
Examples of: “Team use of inputs”
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.Examples of “centralized position of some party in contractual arrangements”
- monitor/supervisor/entrepreneur
- dean of university
- general manager/coach/owner of firm
In some cases, shared use of inputs is more efficient than non-shared use.
Teams of consultants.
Collaboration on group projects in class.
The Metering Problem:
suppose individual output is extremely difficult or impossible to directly observe: only collective output can be.
Incentive problem:
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.
Individual contracts among individuals in this case can be extremely costly.
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.
external competition to deter shirking
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.
hire a monitoring specialist.
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.
Who monitors the monitor?
The market, if the monitor is the residual claimant – reaps the marginal benefits from increased productivity.
Ownership arises from
role as monitor! (We might think the direction of causation is the other way around…)
Efficiency gains
benefit all of those in the organization.
Attributes of Classical Firm
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.
