Organization and Management

Theory of the Firm

Asks where firm boundaries lie (make or buy). Three perspectives: the transaction-cost approach (Coase) compares internal and external transaction costs; the rent-seeking approach (Williamson) shows how incomplete contracts and relationship-specific investments create quasi-rents and hold-up, which integration can stop by fiat (GM–Fisher Body). The property-rights model (Grossman/Hart/Moore) shows that asset ownership shapes the upstream party's incentives: integration removes destructive but also constructive incentives and is optimal only if k > √3.