The theory of the firm seeks to explain the existence and boundaries of the firm in relation to the market. Since the pioneering work of Coase (1937), economics has developed a whole family of theories that focus on the ability of firms to economize on certain costs of using markets. More recently, researchers in strategic management have published several theories of the firm that have tended ...

In his seminal article, Coase (1960) turned the world of economics upside down. I t might even be said that with one (longish) stroke of the pen, he created the entirely new sub-discipline of Law and Economics; and that he did so out of the ashes of a t least one part of the traditional field as i t stood before his onslaught: that occupied by Pigou (1932). Previously, the view of the professio...

An implication of the Coase theorem is that under certain conditions, the market equilibrium in a cap-and-trade system will be cost-effective and independent of the initial allocation of tradable rights. That is, the overall cost of achieving a given aggregate emission reduction will be minimized, and the final allocation of permits will be independent of the initial allocation. We call this th...

Elected representatives have little incentive to pursue the interests of those electing them once they are elected. This well-known principle-agent problem leads, in a variety of theories of government, to nonoptimally large levels of government expenditure. An implication is that budgetary rules are seen as necessary to constrain politicians’ tax and spending behavior. Popular among such const...

If a coalition of countries implements climate policies, nonparticipants tend to consume more, pollute more, and invest too little in renewable energy sources. In response, the coalition’s equilibrium policy distorts trade and it is not time consistent. By adding a market for the right to exploit fossil fuel deposits, I show that these problems vanish and the …rst best is implemented. When the ...

A formalization of the Coase-Williamson-Cheung theory of the firm is used to examine the trade-off between the firm and the market as institutions for organizing production in a dynamic, general equilibrium model with increasing returns to labor specialization. The model considers the interaction of internal and external transaction costs and the gains to labor specialization in determining imp...

We consider two-person bargaining games with interdependent preferences and bilateral incomplete information. We show that in both the ultimatum game and the two-stage alternating-offers game, our equilibrium predictions are consistent with a number of robust experimental regularities that falsify the standard game-theoretic model: occurrence of disagreements, disadvantageous counteroffers, and...

In his famous article on “The nature of the firm”, Ronald Coase (1937) sought to answer the question why firms exist, why there are many firms and not just one, why people do not work as individual producers but rather in firms. He suggested that transaction costs could explain the boundaries of the firm and that suggestion later on gave rise to an abundant literature on vertical integration. T...

What kind of economic activity is conducted through markets and what kind is conducted through firms? We approach this Coaseian question by way of an employment relation between players. Every players has an endowment of 100% of his time. He may choose to give away part of his time to other players. We will work the employment relation into characteristic functions (cooperative game theory). He...

This chapter is a survey of modern theories of the firm. We categorize these as belonging either to the principal-agent or the incomplete contracting approach. In the former category fall, for example, the Alchian and Demsetz moral hazard in teams theory as well as Holmstrøm and Milgrom’s theory of the firm as an incentive system. Belonging to the incomplete contracting branch are theories that...