The Theory of the Firm

This chapter is a survey of modern theories of the firm. Foss, Lando and Thomsen categorize these as belonging either to the principal-agent or the incomplete contracting approach. In the former category fall, for example, the Alchian and Demsetz moral hazard in teams theory as well as Holmstrшm and Milgroms theory of the firm as an incentive system. Belonging to the incomplete contracting branch are theories that stress the importance of the employment relationship (for example, Coase and Simon) as an adaptation mechanism, theories that stress the importance of ownership of assets for affecting incentives when contracts must be renegotiated (Williamson, Grossman and Hart, Hart and Moore), and some recent work on implicit contracts (Baker, Gibbons and Murphy). Authors argue that these different perspectives on the firm should be viewed as complementary rather than as mutually exclusive and that a synthesis seems to be emerging.

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