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2018 | Book

Introduction: Why Does Capital Hire Labour? Read chapter Read first chapter

The Origin of the Capitalist Firm

An Entrepreneurial/Contractual Theory of the Firm

Author: Weiying Zhang

Publisher: Springer Singapore

Part of: Springer Professional "Wirtschaft+Technik" , Springer Professional "Wirtschaft"

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About this book

The book addresses the entrepreneurial origin of the capitalist firm and its asymmetric contractual relationships between capitalists, workers, managers and entrepreneurs, and explains the origin of the firm by focusing on entrepreneurship. A hidden action model shows how assigning residual claim to entrepreneurs can provide a better overall incentive; a hidden information model demonstrates that capitalists are given priority and have authority to select the management, because capital can signal entrepreneurial ability; and a general equilibrium entrepreneurial model shows that the equilibrium relationships between different members of the firm depend on the joint distribution of ability, wealth and risk attitudes in the population. Overall, the book reveals that the capitalist firm is more efficient, not only because it provides better incentives but also because it ensures that the most entrepreneurial people control the firm.

Table of Contents

Frontmatter
Chapter 1. Introduction: Why Does Capital Hire Labour?
Abstract
The firm is the typical organizational form of the market economy. The most significant characteristics of the firm are the asymmetric contractual arrangements between different participants (factor-owners) in both distribution of returns and control rights. Within the firm, some participants are called “employers”, while others are called “employees”.
Weiying Zhang
Chapter 2. Marketing, Producing, Monitoring and the Assignment of Principalship
Abstract
What distinguishes a market economy is that a producer produces goods not directly for his own consumption but for markets through which he sells outputs and buys in inputs. Accordingly, his income and hence his utility do not just depend upon how much he has produced from given inputs but also upon how much he can charge for his outputs and how much he has paid for the inputs. What concerns him is the dot of the price vector and product vector (therefore the net return) rather than the product vector itself.
Weiying Zhang
Chapter 3. Marketing Ability, Personal Wealth, and Capital-Hiring-Labour
Abstract
The purpose of Chap. 2 was to demonstrate the optimal assignment of principalship between the marketing member and the producing member. It has been shown that assigning principalship to the marketing member is optimal because marketing activities dominate uncertainty, and because the marketing member’s behaviour is more difficult to monitor. This provides a rationale for the asymmetric relationship within the firm between the entrepreneur (or management) and workers; that is, the former holds authority over the latter and the latter agree to obey that authority within some limits.
Weiying Zhang
Chapter 4. A General Equilibrium Entrepreneurial Model of the Firm
Abstract
The free choice of occupations is said to be one of the major virtues of a market economy. However, the fact is that the choice of becoming an entrepreneur is considerably constrained by personal wealth, both explicitly and implicitly. Evidence shows that capital is essential for entrepreneurial choice. Many would-be entrepreneurs fail to start in business because they are short of start-up capital.
Weiying Zhang
Chapter 5. Conclusions
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.
Weiying Zhang
Backmatter
Metadata
Title
The Origin of the Capitalist Firm
Author
Weiying Zhang
Copyright Year
2018
Publisher
Springer Singapore
Electronic ISBN
978-981-10-0221-2
Print ISBN
978-981-10-0220-5
DOI
https://doi.org/10.1007/978-981-10-0221-2