Chapter

Established Theories of the Firm

Oliver Hart

in Firms, Contracts, and Financial Structure

Published in print October 1995 | ISBN: 9780198288817
Published online November 2003 | e-ISBN: 9780191596353 | DOI: http://dx.doi.org/10.1093/0198288816.003.0002

Series: Clarendon Lectures in Economics

 Established Theories of the Firm

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Discusses why neither neoclassical nor principal‐agent theories can satisfactorily explain a long‐standing issue in organization theory: the determinants of the boundaries of the firm. The final section of the chapter discusses transaction costs theories. The transaction costs approach points out the importance of incomplete contracting, hold‐up problems and opportunistic behaviour in shaping the incentives of two parties to undertake relationship‐specific investments. However, the author argues that, as its stands, transaction costs theory cannot pin down firm boundaries since it does not provide us with a precise mechanism that explains what changes when a merger takes place.

Keywords: firm boundaries; hold‐up problem; incentives; incomplete contracts; investment; merger; neoclassical firm; opportunism; principal‐agent model; transaction costs

Chapter.  5379 words.  Illustrated.

Subjects: Financial Markets

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