Handbook of Economic Organization
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Handbook of Economic Organization

Integrating Economic and Organization Theory

Edited by Anna Grandori

This comprehensive and groundbreaking Handbook integrates economic and organization theories to help elucidate the design and evolution of economic organization. Economic organization is regarded both as a subject of inquiry and as an emerging disciplinary field in its own right, integrating insights from economics, organization theory, strategy and management, economic sociology and congnitive psychology. The contributors, who share this integrated approach, are distinguished scholars at the productive peak in their fields. Each original, state-of-the art chapter not only addresses foundational issues, but also identifies key issues for future research.
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Chapter 6: The enterprise as community: firms, towns, and universities

Scott E. Masten


At a very broad level, firms and municipalities share a number of features. Among other things, both are self-governing entities that make investments and purchase, produce, and distribute goods and services, sometimes, but not always, for an explicit price. Yet towns and firms are perceived as being governed differently: Whereas municipalities are governed democratically, the archetypal firm is viewed as an autocracy. The sharp contrast conventionally drawn between ‘autocratic’ firms and more ‘democratic’ entities like towns and cooperatives is misleading, however. As Henry Hansmann (1988) has pointed out, traditional business corporations are, in essence, lender cooperatives, organizations over which investors exercise democratic control. From this perspective, the issue becomes less one of whether communities or enterprises are democratically governed but who gets to vote. This chapter explores the role and limitations of democratic governance and the factors that contribute to the dominant forms of governance observed in political and commercial settings. Following an overview of the functions of democracy, I discuss some of the distinctive and common features of town and firms. I then present evidence on the extent of faculty participation in decision making in American (United States) colleges and universities and discuss the origins and possible reasons for the existence of and observed variations in democratic governance in academic institutions. I conclude that a primary function of democratic governance is protecting the interests of parties for whom markets and contracts are least effective and discuss the implications of this function for the governance of business enterprises.

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