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Erschienen in:

2018 | OriginalPaper | Buchkapitel

5. Conclusions

verfasst von : Weiying Zhang

Erschienen in: The Origin of the Capitalist Firm

Verlag: Springer Singapore

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Abstract

A complete theory of the firm must at least deal with the following three interrelated problems: (i) Why does the firm exist in the first place? (ii) How is principalship (residual claim and authority) assigned among the different members of the firm? (iii) What are the optimal contracts that the principal should use to control agents? While much of the literature on the theory of the firm has so far focused on the first and the third problems, the present thesis is intended to make a contribution to understanding the second problem. The main arguments can be summarized as follows.

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Vorheriges Kapitel A General Equilibrium Entrepreneurial Model of the Firm

As we have argued, asymmetry of monitoring is quite intuitive. A glance at the producing members will reveal whether they are working, while a stare at the marketing member may reveal little about what he is thinking.

Let us just repeat the following example to sharpen this argument: Suppose that there is a working team of two person A and B. They work only during the night when the moonlight shines. The production technology requires that person A works in the light while person B works in the shadow. The output cannot be attributed to each individual’s marginal effort. Then, obviously, it is preferred to let person B claim the residual than person A, because person A cannot see what person A does while person B can easily see whether person A works hard or shirks. In the context of the firm, the marketing member is a worker-in-the-dark, whereas the producing is a worker-in-the-light.

Here following Knight (1921), we understand that the entrepreneur has dual functions: making decisions and bearing risks.

This is the basic framework of the principal-agent literature. See Hart and Holmstrom (1987) for a survey.

Education is a signal not necessarily because it improves one’s ability, but because the cost of education is lower for high ability people than for low. See Spence (1973).

But in this case, nobody has any advantages over others in marketing, and thereafter the firm itself becomes redundant in Coase’s sense.

My research work on this topic was partly motivated by my personal experience of socialist China where because of lack of capitalists, most management posts of the state -owned enterprises were occupied by lemons. Fortunately, more and more capitalists are emerging in China as the reform program proceeds, which is certainly helpful in improving the average quality of managers.

Capital abuse by management can take various forms, one of which is “overinvestment” for career concerns (See Holmstrom and Ricart 1986).

The agency theory literature of the capital structure initiated by Jensen and Meckling (1976) decomposes the agency problems into the conflicts between the manager who holds less than 100% share and outside shareholders and the conflicts between shareholders and debt-holders. It is argued that the capital structure is determined by minimization of the agency costs. For a comprehensive survey of this literature, see Harris and Raviv (1991).

For a survey and synthesis, see Rosen (1992).

Titel: Conclusions
verfasst von: Weiying Zhang
Verlag: Springer Singapore
Buch: The Origin of the Capitalist Firm
Print ISBN: 978-981-10-0220-5

Electronic ISBN: 978-981-10-0221-2

Copyright-Jahr: 2018
DOI: https://doi.org/10.1007/978-981-10-0221-2_5