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Economics of Organisations TAKE HOME EXAM (For Second Writer) - Essay Example

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Economics of Organisations TAKE HOME EXAM (For Second Writer)

When there is a team effort like this, you have information problems: it is hard to tell who is shirking.
"The essence of the classical firm is identified here as a contractual structure with: 1) joint input production [team efforts]; 2) several input owners [e.g. each laborer owns himself]; 3) one party who is common to all the contracts of the joint inputs [the employer/owner]; 4) who has rights to renegotiate any input's contract independently of contracts with other input owners [e.g. can hire, fire, etc. to reward inputs that contribute more]; 5) who holds the residual claim [i.e. gets the "residual" income; see below]; and 6) who has the right to sell his central contractual residual status [i.e. can sell the company]."
In earlier literature regarding the theory of the firm, many argued with Alchian and Demsetz. According to Organizations and (2009 p. 1), "The striking insight of Alchian and Dernsetz (1972) and Jensen and Meckling (1976) is in viewing the firm as a set of contracts among factors of production. In effect, the firm is viewed as a team whose members act from self-interest but realize that their destinies depend to some extent on the survival of the team in its competition with other teams." Fama criticizes Alchian and Demsetz, however, for failing to eliminate the entrepreneur from the picture; their theory still includes an employer who, like an entrepreneur, polices shirking because he collects the benefits of doing so."
Alchian and Demsetz had their own unique view of the firm. It is presented in the following diagram:
Figure 2: Organizational Chart

Source: Emerald Insight (2009 p. 1)
Their arguments have their good points and their bad points. I do believe authority plays a large role in the success of organization and that too much authority and/or too little authority can certainly bring a firm down, but I also believe that information is way more than valuable to the rise of a firm, and therefore the cost of it is duly justified. I am just not sure at this point which is more important. Perhaps they are of equal importance.
One could argue that every little function within an organization could make or break that organization. These are just two points of view that we are presented with. Perhaps a broader spectrum of ideas would help to justify one side or the other of the argument. The ideas would come from multiple departments within the organization instead of a few elite professionals. The broader the spectrum is from which to choose, the better conclusion one can make.

Alchian, AA. Principles of Professional Advancement 1996. Economic Inquiry, Vol. 34.
Alchian, AA, JM Buchanan; H Demsetz, A Leijonhufyud, 1996. Economic Inquiry. Vol. 34.
Alchian and Demsetz: Production, Information Costs, and Economic Organization 2009. Wikisum. Available at ...Show more


It is a well-known fact that Alchian and Demsetz attempt to counter the claim that the essence of the employment relation is authority. Coase argued differently, by saying that firms have the tendency to acquire high internal costs through continuously negotiating new contracts…
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Economics of Organisations TAKE HOME EXAM (For Second Writer) essay example
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