Managerial Rents and Outside Recruitment in the Coasian Firm

Abstract

This article analyzes managerial rents and outside recruitment in the coasian firm in the terms of neoclassical theory of the firm. In the corporation, decision making about the use of capital by managers and risk taking by the owners of capital are specialized activities. Various institutional mechanisms have been analyzed as forces disciplining the opportunistic behavior of management under these conditions. The authors maintain that no single mechanism, such as wage revision in the managerial labor market or an internal device that relies on influencing incentives by making executives residual claimants in the firm, is sufficient to solve problems of managerial incentives. Instead, the margins of several control devices are extended simultaneously to maximize the value of the firm, net of the cost of control. In this context the authors will emphasize one means of managerial control which has not been fully analyzed to date-the impact of outside hiring on the behavior of incumbent managers.