Theories Of The Firm Flashcards
TCE Why do firm’s emerge? 2
Using the market creates transaction costs
○Search costs
○Coordination costs
○Enforcement costs
Coordinating transactions inside the firm reduces transaction costs and increases efficiency and profitability.
TCE why is it a balancing act? 1
The costs of organizing additional transactions inside the firm rises with scale
TCE how is opportunism relevant ? 2
●Same Problem: “how do we persuade company management to pursue shareholders’ interests and company/shareholder profit maximization, rather than their self‐interest?”
●Managers are opportunistic by nature (opportunism)
TCE what did course say?
Coase: firms exist to minimize costs of exchanging goods and services
TCE what did Williamson say?
Williamson: firms exist as a result of relationship-specific investments and to minimize opportunism
TCE purpose interest and CG? 3
●Purpose: reduce transaction costs and opportunism
●Interests: investors (who want control over their investments)
●Corporate governance: organise factors of production and stop opportunism
NC what is this theory 3
●The firm as a nexus of contracts
●a nexus of contracts has no motivating purpose
●Corporate structure will be the outcome of market-based negotiations
NC what did Easterbrook and Fischel say?
The corporation is a complex set of explicit and implicit contracts, selected right choice for risks and opportunities that are available in a large economy.
NC what are the costs in an agency? 3
●Monitoring costs
●Opportunity costs
●Collective action costs
NC summary? Purpose interest and CG ? 4
●The firm is a set of contracts between the owners of different factors of production
●Purpose: corporate purpose is irrelevant
●Interests: depends on the terms of the contract
●Governance: to reduce agency costs (between who?)
TPT what is this theory? 5
●Firm is a special class of contracts among a group of joint inputs (i.e., team production
●Team production arises where
(1)Several types of resources are used
(2)The product is not a sum of separable outputs of each cooperating resource
(3)Not all resources used in the team product belong to one person
TOT How is this a problem? 3
1)How should rents (dividends) be divided?
(2)How to prevent shirking?
(3)How to accommodate groups other than shareholders who provide specialized inputs?
TPT what did Alchian and demsetz say 5
Owners are given a bundle of rights:
(1)To be a residual claimant
(4)To alter the membership of the team
(5)To sell these rights
TPT what did Blair and stout believe ? 4
●Mediated hierarchy:
○allocate rents among various stakeholders,
○coordinate the activities of the team members, and
○mediate disputes
TPT Summary P I CG ? 6
●Purpose: the corporation provides a mediating hierarchy also guards the coalition against self dealing directors
●Interests: to be determined by the board of directors
●Governance: empower the board of directors to allocate rents and guard against self-dealing
