Incomplete Contracts and the Theory of the Firm

Abstract

Nature of the Firm (together with Coase's later paper, Problem of Social Cost) has had an enormous influence on the development of research in the theory of organization, even if for a long time it was, in Coase's words, much cited and little used. The situation has changed in the last ten to fifteen years, however, with the publication of a number of contributions which have refined and extended Coase's ideas about the firm. My plan in this paper is to reflect on recent developments and to offer a perspective on where the field stands and also where it may be going. I will begin with a brief summary of the main ideas and issues as they have grown out of Coase's work.' I will then discuss how the firm as an institution can be thought of as arising from the incompleteness of contracts and the need to allocate residual control rights. Finally, I will return to a comparison of this view of the firm with others that have been advanced in the literature.