Firms, Organizations and Contracts: A Reader in Industrial Organization

By Peter J. Buckley; Jonathan Michie | Go to book overview
Save to active project

8. Summary

While ordinary contracts facilitate efficient specialization according to comparative advantage, a special class of contracts among a group of joint inputs to a team production process is commonly used for team production. Instead of multilateral contracts among all the joint inputs' owners, a central common party to a set of bilateral contracts facilitates efficient organization of the joint inputs in team production. The terms of the contracts form the basis of the entity called the firm--especially appropriate for organizing team production processes.

Team productive activity is that in which a union, or joint use, of inputs yields a larger output than the sum of the products of the separately used inputs. This team production requires--like all other production processes-- an assessment of marginal productivities if efficient production is to be achieved. Nonseparability of the products of several differently owned joint inputs raises the cost of assessing the marginal productivities of those resources or services of each input owner. Monitoring or metering the productivities to match marginal productivities to costs of inputs and thereby to reduce shirking can be achieved more economically (than by across market bilateral negotiations among inputs) in a firm.

The essence of the classical firm is identified here as a contractual structure with: 1) joint input production; 2) several input owners; 3) one party who is common to all the contracts of the joint inputs; 4) who has rights to renegotiate any input's contract independently of contracts with other input owners; 5) who holds the residual claim; and 6) who has the right to sell his central contractual residual status. The central agent is called the firm's owner and the employer. No authoritarian control is involved; the arrangement is simply a contractual structure subject to continuous renegotiation with the central agent. The contractual structure arises as a means of enhancing efficient organization of team production. In particular, the ability to detect shirking among owners of jointly used inputs in team production is enhanced (detection costs are reduced) by this arrangement and the discipline (by revision of contracts) of input owners is made more economic.

Testable implications are suggested by the analysis of different types of organizations--nonprofit, proprietary for profit, unions, cooperatives, partnerships, and by the kinds of inputs that tend to be owned by the firm in contrast to those employed by the firm.

We conclude with a highly conjectural but possibly significant interpretation. As a consequence of the flow of information to the central party (employer), the firm takes on the characteristic of an efficient market in

-95-

Notes for this page

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
Loading One moment ...
Project items
Notes
Cite this page

Cited page

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

Cited page

Bookmark this page
Firms, Organizations and Contracts: A Reader in Industrial Organization
Table of contents

Table of contents

Settings

Settings

Typeface
Text size Smaller Larger
Search within

Search within this book

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

While we understand printed pages are helpful to our users, this limitation is necessary to help protect our publishers' copyrighted material and prevent its unlawful distribution. We are sorry for any inconvenience.
Full screen
/ 482

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.

Are you sure you want to delete this highlight?