Transaction cost, corporate governance and division of labor—A general equilibrium analysis of professional managers and its implication to China's practice

Abstract

This paper develops a Walrasian general equilibrium model based on transaction cost and specialization to investigate the emergence and evolution of the role of management services in a competitive market with the general concern of corporate governance. It explains the reason why along the commercialization and modernization of human society, there is substantial increment of professional managers available for business world, and also becoming more affordable for more business companies. With the improvement of transaction efficiency, the market demand of professional managers are more preferred and profitable, which will also bring about new business structures and new economic institutional systems to improve the well-being to the overall members of society. Thereby, hiring professional managers in a competitive market can promote aggregate productivity by enlarging the scope for trading off network effects of the division of labor on aggregate productivity against transaction costs. To business practitioners, this model suggests hiring professional managers a key element of business viability during that a major transition took place in human society. China's recent practices in ownership transformation and corporate governance have also been examined, which further proves our argument that performance and effectiveness of interaction and interrelation between ownership and corporate governance are endogenously determined by different market conditions. It is impossible to achieve success ownership transformation and establish effective corporate governance without upgraded changes and consecutive adjustment and improvement of market conditions to facilitate the solid function of market mechanism.