Surplus, Contractibility and Theory of the Firm

Abstract

A theory of the firm is advanced as a unified property rights for surplus created by cooperative activity. This differs from traditional transaction cost literature which views the firm as a governance structure. Individual purposive entities act in their own interests, within or without a firm. Only contractible inputs are coordinated for joint surplus maximization. Each party determines her non-contractible inputs for her own benefits, which explain many observed firm phenomena. An equilibrium models are developed for the firm and used to explain the questions of firm existence, boundary, and ownership.