The Theories of the Firm

Abstract

Introduction What is a firm? Since the seminal article on the nature of the firm by Coase (1937), this question has been put under the attention of a growing number of economists looking for a theory of the firm, and, since the beginning of the 1970s, significant progress has been made. Yet, despite the important literature on the subject, this question is still an empirical as well as a theoretical challenge (Garrouste and Saussier 2005; Gibbons 2005). The empirical challenge comes from the difficulty to form a complete picture of the phenomenon since firms have a large spectrum of more or less formal governance structures, which range from hierarchy to outsourcing and from outsourcing to internalization (Menard 2004b). The theoretical challenge comes from the multifaceted nature of the phenomenon, which can hardly be grasped by a unique theory, thus leading to the multiplication of theoretical approaches which may be considered as complements or substitutes, depending on the question they try to answer. In fact, a theory of the firm has the difficult task of being able to answer many questions. First: the question of the nature and boundaries of the firm. Why are some transactions internalized, others externalized, and others both internalized and externalized at the same time? Second: the question of the internal structure of the firm. How is the firm organized? How is production organized? What incentives, controls, internal hierarchies exist? Third: the question of the relations between firms and the market.