Theory Of The Firm

Ronald Coase, "The Nature of the Firm" - size (BigCo) driven by Transaction Cost

Peter Small argues that Virtual Community communications reduce transaction costs sufficiently to increase the use of contractors (OutSourcing) instead of employees (for building Internet offerings, at least).

Coases Pengiun: Yochai Benkler's essay applying theory to Open Source software.

Oliver Williamson has argued that markets and hierarchical organizations, such as firms, represent alternative Governance structures which differ in their approaches to resolving conflicts of interest. The drawback of markets is that they often entail haggling and disagreement. The drawback of firms is that authority, which mitigates contention, can be abused. Competitive markets work relatively well because buyers and sellers can turn to other trading partners in case of dissent. But when market competition is limited, firms are better suited for conflict resolution than markets. A key prediction of Williamson's theory, which has also been supported empirically, is therefore that the propensity of economic agents to conduct their transactions inside the boundaries of a firm increases along with the relationship-specific features of their assets.

Mar'2011: Gregory Rader notes how a BigCo can prosper by having consistently-trust-worthy people (Reputation Management), to reduce the cost of Group Forming. This strategy can only be effectively employed by institutions offering a filter that amplifies employee capabilities towards meaningful and desirable work... If the institution does not actually attract the right people and filter out the wrong people then the scale of that filter provides no benefit to the individual.

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