T3 Dispersed Knowledge and an E. Theory of the firm

Question 1

How can the theory of dispersed Knowledge by Dev et al. explain the existence of firms? (alternatively to transaction cost theory)

Answer 1

Dispersed Knowledge

• ->cross-sectional uncertainty –>Knightian uncertainty –>heterogeneous expectations: individuals differ in opp costs, knowledge, expectations.: ind. opp. nexus. This leads to NO market transaction: value opp differently
• ->need for new firm genesis in existing or new firm

Question 2

What is the difference between cross-sectional and knightian/longitudinal uncertainty?

Answer 2

• cross-sectional: different people in different places know different things.
• knightian: additionally: different expectations over time (of the future)

Question 3

Acc. to dispersed knowledge theory: how can an opportunity be exploited when identified OUTSIDE of an existing firm?

Answer 3

• Service markets: there is no market for the service yer –>E organises uncertainty about outcome into a contract –> firm, residual contact
• Product markets: high novelty –> high uncertainty –> high likelihood of failure (no comparables)
• Factor markets: sales could be in form of licenses, E- knows how to keep cost of factors lower than the market

Question 4

Acc. to dispersed knowledge theory: how can an opportunity be exploited when identified WITHIN an existing firm?

Answer 4

1) overall agreement on value –> expl. within firm, BUT: pay attention if the firm has rights to the idea
2) agreement only within the firm: firm has specific knowledge –> expl within firm
3) agreement outside the firm: cost inside too high to implement.–> expl. in new firm.
4) no agreement –> true knightian uncertainty