The Theory of the Firm
According to Holmstrom and Tirole (1989), the theory of the firm tackles two central questions. First, why do firms exist, and second, what determines the firms’ scale and scope. The theory of the firm offers a trade-off between the benefits and costs of integration to find an answer why not all economic transactions are organized within a single firm (Holmstrom and Tirole, 1989: 65-66). Departing from the irrelevance assumption of the firm in neoclassical perfect market theory, new institutional economic theory describes the boundaries of the firm within an environment of market frictions (Lockett and Thompson, 2001: 728).
KeywordsAgency Theory Transaction Cost Economic Asset Specificity Incomplete Contract Transaction Cost Theory
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