Scribd Logo
Upload

Welcome to Scribd!

  • 4 Firms and New Organizations

    Uploaded by

    Yodtoshdlw Geez
    5 views10 pages

    Original Title

    4 Firms and new Organizations

    Copyright

    © © All Rights Reserved

    Available Formats

    PDF or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    Report this Document

    Copyright:

    © All Rights Reserved
    Download as PDF or read online from Scribd
    Flag for inappropriate content
    5 views10 pages

    4 Firms and New Organizations

    Uploaded by

    Yodtoshdlw Geez

    Copyright:

    © All Rights Reserved
    Download as PDF or read online from Scribd
    Flag for inappropriate content
    of 10
    4 ee The old firm and the new organization For along time the theory of. ° i of economic organization and the theory of the firm were nearly synonymous, Standard economics textbooks ccasion, aly refered to other form of organization, such athe family and gov- firm was the only organization consistently and system- accally discussed. Nevrthels, the exact function of the fem serene : ‘add substance to the construct called fim” did not fare very well, and Coase’s (1957) revolutionary ap- Broach to organization required several decades a8 well as his own work eco cot to begin to influence economists. Boh of these forts fon the firm. In more recent decades, Coase’s transaction cos ideas have been exploited both by economists attempting to generates theory ofthe frm and by others questioning the usefulness of such a i rhe insights gained through these efforts have been consider- able; nevertheless our understanding of organization is its infancy. In ths chapter, the transaction cost approach to organization is Different subsets of attributes of assets possessing many at to be owned by diferen indvidals Explaining the pater of sack nership is central othe study of organization, My thesis in this exten- sion is that as a transactor’s ability to affect the outcome of an aspect of a transaction increases, the tansactor will assume more responsibilty for the associated variability; that is, she or he will end to assume a greater Share of, and thus become more ofa residual claimant to, the income of atmibutes she oe can affect. Consequently, the ownership of physical atities may be divided, enabling the owners (and the users) of different acibuts co be separate individuals. The management of entities with ivided ownership requires “organization,” the subject of this chapter. In "Prominen mong th tnong thes are Alchin and Demsets (972), Wllamson sen and Meshing (1976), Klee, Crawford, and Alchas (978), and Ghevee Coke 42 ‘The old firm and the new organization order to appreciate the need for the transaction cost approach and its, ‘contribution, the received model of the firm must first be assessed. I will ‘attempt to'show that as a description of real firms the received model of the firm is untenable, and that under conditions that would allow a textbook firm to exist its function would become inconsequential, A CRITIQUE OF THE RECEIVED MODEL OF THE FIRM ‘Underlying the received model of the firm is the production funetion: a relationship tracking the highest output any set of inputs can produce with the available technology. Returns to scale are assumed first to in- crease and ultimately to decline because of factors such as the uniqueness of specialized resources and the indivisibility of equipment and of organiz~ cers. The fim is simply an organization that selects (the optimal) points on the production function, acquires the necessary inputs, transforms them according to the production function into output, and sels that output. Its objective is profit maximization: basically, maximizing the difference beeween revenues and expenses. The cost function plays a major role in shaping the firm; of particular interest is the minimum point on the that determines the scale of the competitive firm.* ‘assumption behind the conventional derivations is that of costless information, particularly of the production function itself and of the prices and the attributes of inputs and outputs. If information is freely available, then factors’ contributions can be easily assessed, and ‘monitoring their performance becomes superfluous. It is not surprising, then, that monitoring receives almost no attention in these discussions. Sal, given huiman nature and the social character of production, even the notion of the production function itself poses some problems. This func- tion may bea strictly technological relationship; however, as labor is one of the factors used in production, the question of how labor is actually applied is relevant. If points on the production function are to yield the highest output from given inputs, the labor input must be strained to the limit, which implies, for instance, that workers hired for a day should be exhausted by the end of the day. It is clear that workers seldom work to exhaustion; to a worker, effort isa variable under her or his control. The and production functions. The emerging correspon ‘cost functions and the production function, howev “Duality theory relates dence between the fir 4B Economic analysis of property rights — labor, then, must decide on the desired level of effort communicate thi information tothe we ofthe labor services. ogical relations to be supplemented with h production, particularly ints relation 0 cost loses some af its technologi ithe oma form ase employing puts anne enone te cee employing inputs and info the nature of the What precisely does the fi 8 the firm produce? The implicit assumption et sleet approach ns tobe tha ech fm proms ne fonction. ray sem tat wo fine generating he same ouput (hs Same Q) do indecd perform the same operations In ral however, Ios fms perm lage nmber of open and the operon peor yea ot ash te a performed by the au sider wine as an ouput. Some wineries grow al he grapes ey use to make wine, whereas others buy atleast some of thee grapes. I does not seem that such diffe ferences among firms are attributable to that “25 pare of age enterprise ae decealized, the gin of econo- ico be chive without sang sede cconsnicsfsorsal on al fancions were peformed inal. case few fms perform oy coed pagilirint ated conclusion that the textbook firm is tcon ee is necessary to make the textbook cost ine could argue that wine is nota suffice oe is not a sufficiently narrowly defied com- nda th vo ne ae oan ile co me indeed, may be true. Similarly, Safeway and the cased be in different industri ‘isting theory, however, de ae boviea gies wat one dierent commode, ‘Ay discrep eee ims between the production and cost functions may, the a bated erences th commode, pode by sc em The theory does not appear ro be expableof seftaion. In this ligh i Specification of the precise units b spe cise units by which inputs are receive aie ion end etsy ety eS In s¢ of labor, inputs are sometimes measurec eae Sines by pesformance, Labor service a major producto foncton pt jon function input stip nena ool sumu php wos hve fn tcp Timea une are diferent and, consequently, thatthe ex et ‘The si . The old firm and the new organization ‘that workers supply. The labor input the production function requires is in ticency units: One worker contributing rwice as many as another trowies ewice the labor input. In a similar vein, the demand for labor is aonine function of labors contribution to output, In the standard feauralation of the cost function, however, labor when explicitly consid- ors not usually entered by units that correspond directly to its contri- traion. Instead, he labor input entering the cost function is measured by ar oar, and sc labor is accounted for in units of time. Hours can readily Jubstieute for efficiency units only if the relationships between the two are proportional. Because workers themselves are maximizes, i. sons Riehly plausible that inducing workers to apply thee time efficiently eure: supervision. Moreover, supervision costs are unlikely to be pro- portional to labor costs he relationship between the two isnot likely co femain constant under all ciccumstances. The use of the hour as the unit of labor input in cost functions, then, is ot justifed by standard production function considerations, and i is prope fo switch from one function to the other unless account i tan oye faeanation and supervision problems. The reason hours are neverthe: canoe in cost functions seems to be simply thatthe dominant mode of fenploying labor happens to be by time, and the assumption of props: deality between actual hours and efficiency units is made in order thar hours may be employed in production function analyses. "the need for supervision arises because the factors contributing to firm's production are not all owned by the same person. The ownership viresore used by the frm, however, is seldom explored in the received ‘analysis, even though the typical ‘ownership assumptions are not aoaty ioe, Firms are assumed to own the capital equipment they use and antes labor. Hiring labor means renting laborers from the owners of the capital good “labor.” Ina non-slave economy, workers allow firms ro use sone of the services the capital good can generate. If firms choose to own their capital equipment rather than rent it, then rental is more problem: sie than ownership; it is plausible, then, that the use of labor, too, is problematic. In x ‘used by firms is owned by thems Prpital is also rented in part. First, o the extent that firms are financed by Feorowing, they are renting rather than owning the capitals and second, Fons often rent space and equipment. Itis not self-evident that those firm ‘owners who borrow of rent cap ‘who employ labor have interests qreroincide with the interests of the owners ofthe rented assets in how larly those viewed as advanced, the productive factors are rational differences among facto fo measure separately individual iver information assumptions, workers should, Fort and not for thee time. 4s Economic analysis of property rights these assets should be employed. The question of whether these interests coincide is simply ignored, as a rule, in the textbook analysis of the fr, If asset owners’ interests do not coincide, then methods of reconciling them must be considered. Exploring a costless-transa for some an: the firm. ction world may of course be appropriate lyses.Itis not appropriate or useful, however, for analysis of less transacting dispenses with the problems of supervision and of divergence of interests among collaborating owners of assets, In the textbook characterization of firms, the inputs purchased in the mar, ket are assumed to perform the tasks expected of them automaticaly and fully. This would hold trie ifthe relationship between inputs and outputs ‘were costlessly observable, because then input owners could be remuner. ated stritly onthe basis oftheir contributions; such costless observability is one of the features necessary (and indeed sufficient) for costless trans. acting to exist, Were transacting costless, the employer could, for in. stance, costlessly observe whether or not workers time is perfectly uti- lized and could compensate workers accordingly. Under such conditions, however, any other method of remuneration could be as easily imple. mented. Ir does not matter, then, whether the nominal unit of pay is taken to be the wage, the contribution to output, or any other unit; each can be converted to any of the others without slippage. A firm, therefore, could function smoothly; but the market where direction is strictly by prices would perform just as smoothly. A model in which firms perform a non. role must incorporate the costs of transacting, Itis by now a well-accepted idea that evaluating the cor factor to output is costly, ution of a and that consequently such evaluations are not expected to be performed with complete accuracy. In the presence of inaccuracies, factor owners who rent ou pay will gain by reducing ther effort. Th fanction to the cost function inevit factor ownership. Maximizing cffecs of such shitking and m losses. Therefore, when the ev: choice of contracts among cooperatin their assets for a given rate of teansition from the production irking under dispersed take into account the wg factors becomes significant. DIVIDED OWNERSHIP OF EQUIPMENT ‘Whereas Iwill show that the existence of scale economies in production is neither necessary nor sufficient forthe existence of a large-scale organiza, tion, itis convenient to introduce positive transaction costs by considering problems associated with such a large scale. Large-scale economies can be attained by a centralizing organization, but the participating owners of resources have opportunities to shirk then. Alternatively, such economies 46 ‘The old firm and the new organization by euning each resource owner ito a residual claimant Pou een ft largest ai ae then ein che pec arate Tshall argue that the actual solutions to such pole tear ofthe two forms of organizations that a5 rl of the resource Gwners associated with the operation secs bom Iaimanes to different components salons

    You might also like