Chapter 12: Managerial authority in the Coasean firm: an entrepreneurial perspective
While Coase has been rightly celebrated for his theoretical innovation of explaining the firm’s existence and boundaries in terms of economizing on transaction costs, his more foundational contribution was ontological, conceptualizing the firm as a team of employees, coordinated by a managerial hierarchy, organizing production stages within a single legal entity. In Knight’s (1921) framework, and in the later theories of Williamson (1985) and Hart (1995), the essence of the firm is the ownership relation – a firm is an entrepreneur plus an alienable asset. For Coase (1937), the essence of the firm is the employment relation; a firm is a manager directing a team of employees who must obey the manager’s directives, within specified limits. As Coase (1937: 387) famously put it, “[i]f a workman moves from department Y to department X, he does not go because of a change in relative prices, but because he is ordered to do so.” Hence Coase’s treatment of managerial authority is central to his understanding of the firm. However, Coase’s theory of authority and hierarchy has received much less attention than his views on transaction costs, at least until Coase (1988: 41) noted that the firm per se comes about not when there is a single employment contract, but when “the organizer has contracts with several factors whose activities he coordinates.”
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