Firms, Organizations and Contracts: A Reader in Industrial Organization

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

7. Conclusions

The publicly held business corporation is an awesome social invention. Millions of individuals voluntarily entrust billions of dollars, francs, pesos, etc., of personal wealth to the care of managers on the basis of a complex set of contracting relationships which delineate the rights of the parties involved. The growth in the use of the corporate form as well as the growth in market value of established corporations suggests that at least, up to the present, creditors and investors have by and large not been disappointed with the results, despite the agency costs inherent in the corporate form.

Agency costs are as real as any other costs. The level of agency cost depends among other things on statutory and common law and human ingenuity in devising contracts. Both the law and the sophistication of contracts relevant to the modern corporation are the products of a historical process in which there were strong incentives for individuals to minimize agency costs. Moreover, there were alternative organizational forms available, and opportunities to invent new ones. Whatever its shortcomings, the corporation has thus far survived the market test against potential alternatives.


Notes
1.
We do not use the term 'capital structure' because that term usually denotes the relative quantities of bonds, equity, warrants, trade credit, etc., which represent the liabilities of a firm. Our theory implies there is another important dimension to this problem--namely the relative amounts of ownership claims held by insiders (management) and outsiders (investors with no direct role in the management of the firm).
2.
Reviews of this literature are given by Peterson ( 1965), Alchian ( 1965, 1968), Machlup ( 1967), Shubik ( 1970), Cyert and Hedrick ( 1972), Branch ( 1973), Preston ( 1975).
3.
See Williamson ( 1964, 1970, 1975), Marris ( 1964), Baumol ( 1959), Penrose ( 1958), and Cyert and March ( 1963). Thorough reviews of these and other contributions are given by Machlup ( 1961) and Alchian ( 1965).

Simon ( 1955) developed a model of human choice incorporating information (search) and computational costs which also has important implications for the behavior of managers. Unfortunately, Simon's work has often been misinterpreted as a denial of maximizing behavior, and misused, especially in the marketing and

-151-

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

Table of contents

  • Title Page iii
  • Preface and Acknowledgements v
  • Acknowledgements vi
  • Contents viii
  • List of Contributors xi
  • Foreword xiii
  • Introduction and Overview 1
  • Notes 18
  • References 20
  • I. THEORY OF THE FIRM 21
  • 1: The Equilibrium of the Firm 23
  • 2: The Nature of the Firm 40
  • 3: The Organization of Industry 59
  • 4: Production, Information Costs, and Economic Organization 75
  • Summary 95
  • Notes 96
  • References 102
  • 5: Theory of the Firm: Managerial Behavior, Agency Costs, and Ownership Structure 103
  • Conclusions 151
  • Notes 151
  • References 163
  • 6: Transaction-Cost Economics: The Governance of Contractual Relations 168
  • Conclusion 192
  • 7: An Economist's Perspective on the Theory of the Firm 199
  • Conclusion 212
  • Notes 212
  • II. MARKETS AND INDUSTRIAL ORGANIZATION 219
  • 8: Corporate Culture and Economic Theory 221
  • Introduction 221
  • Conclusion 261
  • Appendix 262
  • Appendix 271
  • Appendix 273
  • References 274
  • 9: Co-operative Agreements and the Organization of Industry 276
  • References 292
  • 10: Interpenetration of Organization and Market: Japan's Firm and Market in Comparison with the US 293
  • Conclusion 317
  • References 319
  • 11: Vertical Quasi-Integration 320
  • Conclusions 336
  • Notes 337
  • 12: Non-Contractual Relations In Business: A Preliminary Study 339
  • 13: Goodwill and the Spirit of Market Capitalism 359
  • III. JOINT VENTURES, NETWORKS, AND] CLANS 383
  • III. JOINT VENTURES, NETWORKS, AND] CLANS 385
  • References 407
  • 15: Joint Ventures 410
  • Conclusion 427
  • References 428
  • 16: Organizations: New Concepts for New Forms 429
  • Conclusion 440
  • Notes 441
  • 17: Markets, Bureaucracies, and Clans 442
  • References 456
  • Notes 459
  • References 473
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