The Nature of the Firm

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2022-05-13 19:00:11

"The Nature of the Firm" (1937) is an article by Ronald Coase. It offered an economic explanation of why individuals choose to form partnerships, companies and other business entities rather than trading bilaterally through contracts on a market. The author was awarded the Nobel Memorial Prize in Economic Sciences in 1991 in part due to this paper. Despite the honor, the paper was written when Coase was an undergraduate and he described it later in life as "little more than an undergraduate essay."[1]

The article argues that firms emerge because they are better equipped to deal with the transaction costs inherent in production and exchange than individuals are.[2][3] Economists such as Oliver Williamson,[4] Douglass North,[5] Oliver Hart, Bengt Holmström, Arman Alchian and Harold Demsetz expanded on Coase's work on firms, transaction costs and contracts.[2] Economists and political scientists have used insights from Coase's work to explain the functioning of organizations in general, not just firms.[3][4] Coase's work strongly influenced the New Economics of Organization (New Institutional Economics).[3]

Given that production could be carried on without any organization, Coase asks, "Why and under what conditions should we expect firms to emerge?" Since modern firms can only emerge when an entrepreneur of some sort begins to hire people, Coase's analysis proceeds by considering the conditions under which it makes sense for an entrepreneur to seek hired help instead of contracting out for some particular task.[7]

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