The firm and the authority relation: Hierarchy vs. organization

Abstract

Research in the modern theory of economic organization predominantly addresses issues relating to one or a combination of three fundamental questions originally posed or implied by Ronald Coase (1937): Why are there firms? What are the firm’s boundaries? And how is the firm’s organizational structure determined? (Foss 1997: 175; Foss and Klein 2008: 426; cf. Garrouste and Saussier 2008: 23). A common starting point for this research, which is often referred to simply as the "theory of the firm," is the assertion of a dichotomy between market and organization. Market transactions are coordinated in a decentralized manner through the "high-powered incentives" of the price mechanism (Williamson 1985: 131-162; 1988), while transactions "within firms" depend on the fiat power in formal, hierarchical organization to coordinate transactions under low-powered (cost plus) incentives.