Hostname: page-component-cd9895bd7-q99xh Total loading time: 0 Render date: 2024-12-25T20:18:52.807Z Has data issue: false hasContentIssue false
  • English
  • Français

Contracts and Hierarchies: A Moral Examination of Economic Theories of the Firm

Published online by Cambridge University Press:  12 February 2018

Jooho Lee
Jooho Lee*
Affiliation:
Pepperdine University
Get access Rights & Permissions [Opens in a new window]

Abstract:

An influential set of economic theories argue that the firm is a nexus of contracts that institute a hierarchy to overcome the problems of incomplete contracting in the market. However, the economic theory of the firm as a hierarchy violates the moral requirement to respect the autonomy of those who contract into the firm. The internal logic of the theory depends on a morally unacceptable abdication of a part of the employee’s capacity to set her own ends in the future. So a different theory is needed to understand the nature and purpose of the firm. The development of such a theory can benefit from business ethicists engaging with existing economic theories of the firm to explore concepts like contracts, agency, and property.

Keywords

theory of the firmhierarchyautonomylaw and economicscorporate governance
Type
Article
Information
Business Ethics Quarterly , Volume 28 , Issue 2 , April 2018 , pp. 153 - 173
Copyright
Copyright © Society for Business Ethics 2018 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

Alchian, A. A., & Demsetz, H. 1972. Production, information costs, and economic organization. American Economic Review, 62(5): 777–795.Google Scholar
Anderson, E. 2008. Expanding the egalitarian toolbox: Equality and bureaucracy. Proceedings of the Aristotelian Society, Supplementary Volumes, 82: 139–160.Google Scholar
Asher, C. C., Mahoney, J. M., & Mahoney, J. T. 2005. Towards a property rights foundation for a stakeholder theory of the firm. Journal of Management & Governance, 9(1): 5–32.Google Scholar
Bainbridge, S. M. 2003. Director primacy: The means and ends of corporate governance. Northwestern University Law Review, 97(2): 547–606.Google Scholar
Baker, G., Gibbons, R., & Murphy, K. J. 2002. Relational contracts and the theory of the firm. The Quarterly Journal of Economics, 117(1): 39–84.CrossRefGoogle Scholar
Bernstein, L. 1992. Opting out of the legal system: Extralegal contractual relations in the diamond industry. The Journal of Legal Studies, 21: 115–157.Google Scholar
Blair, M. M., & Stout, L. A. 1999. A team production theory of corporate law. Virginia Law Review, 85: 247–328.Google Scholar
Boatright, J. R. 2002. Contractors as stakeholders: Reconciling stakeholder theory with the nexus-of-contracts firm. Journal of Banking & Finance, 26(9): 1837–1852.Google Scholar
Boatright, J. R. 2012. Ethics and the conduct of business (7th ed.). Upper Saddle River, NJ: Prentice Hall.Google Scholar
Bratton, W. W. 1989. The new economic theory of the firm: Critical perspectives from history. Stanford Law Review, 41: 1471–1527.Google Scholar
Buchanan, J. M. 2001. Game theory, mathematics, and economics. Journal of Economic Methodology, 8(1): 27–32.Google Scholar
Coase, R. H. 1937. The nature of the firm. Economica, 4(16): 386–405.Google Scholar
Coff, R. W. 1999. When competitive advantage doesn’t lead to performance: The resource-based view and stakeholder bargaining power. Organization Science, 10(2): 119–133.CrossRefGoogle Scholar
Dalley, P. J. 2011. A theory of agency law. University of Pittsburgh Law Review, 72: 495–547.Google Scholar
Donaldson, T., & Preston, L. E. 1995. The stakeholder theory of the corporation: Concepts, evidence, and implications. Academy of Management Review, 20(1): 65–91.Google Scholar
Easterbrook, F. H., & Fischel, D. R. 1991. The economic structure of corporate law. Cambridge, MA: Harvard University Press.Google Scholar
Fama, E. F., & Jensen, M. C. 1983a. Agency problems and residual claims. The Journal of Law & Economics, 26(2): 327–349.Google Scholar
Fama, E. F., & Jensen, M. C. 1983b. Separation of ownership and control. The Journal of Law & Economics, 26(2): 301–325.Google Scholar
Feinberg, J. 1970. The nature and value of rights. The Journal of Value Inquiry, 4: 243–257.Google Scholar
Freeman, R. E. 1994. The politics of stakeholder theory: Some future directions. Business Ethics Quarterly, 4(4): 409–421.Google Scholar
Freeman, R. E., & Evan, W. M. 1990. Corporate governance: A stakeholder interpretation. Journal of Behavioral Economics, 19(4): 337–359.Google Scholar
Ghoshal, S. 2005. Bad management theories are destroying good management practices. Academy of Management Learning & Education, 4(1): 75–91.Google Scholar
Gibbons, R. 2005. Four formal(izable) theories of the firm? Journal of Economic Behavior and Organization, 58(2): 200–245.Google Scholar
Gibbons, R., & Henderson, R. 2012. Relational contracts and organizational capabilities. Organization Science, 23(5): 1350–1364.Google Scholar
Gilson, R. J., Sabel, C. F., & Scott, R. E. 2009. Contracting for innovation: Vertical disintegration and interfirm collaboration. Columbia Law Review, 109(3): 431–502.Google Scholar
Gilson, R. J., Sabel, C. F., & Scott, R. E. 2010. Braiding: The interaction of formal and informal contracting in theory, practice, and doctrine. Columbia Law Review, 110(6): 1377–1447.Google Scholar
Goodpaster, K. E. 1991. Business ethics and stakeholder analysis. Business Ethics Quarterly, 1(1): 53–73.Google Scholar
Grossman, S. J., & Hart, O. D. 1986. The costs and benefits of ownership: A theory of vertical and lateral integration. The Journal of Political Economy, 94(4): 691–719.Google Scholar
Gulati, G. M., Klein, W. A., & Zolt, E. M. 2000. Connected contracts. UCLA Law Review, 47: 887–948.Google Scholar
Hart, O., & Moore, J. 1990. Property rights and the nature of the firm. Journal of Political Economy, 98(6): 1119–1158.Google Scholar
Hayek, F. A. 1945. The use of knowledge in society. The American Economic Review, 35(4): 519–530.Google Scholar
Heath, J. 2006. Business ethics without stakeholders. Business Ethics Quarterly, 16(4): 533–557.Google Scholar
Hendry, J. 2001. Economic contracts versus social relationships as a foundation for normative stakeholder theory. Business Ethics: A European Review, 10(3): 223–232.Google Scholar
Holmstrom, B. R., & Tirole, J. 1989. The theory of the firm. In Schmalensee, R. & Willig, R. (Ed.), Handbook of industrial organization, vol. 1: 61–133. San Diego: Elsevier.Google Scholar
Jensen, M. C., & Meckling, W. H. 1976. Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4): 305–360.Google Scholar
Kant, I. 1785. Groundwork of the metaphysics of morals. New York: Cambridge University Press.Google Scholar
Kant, I. 1797. The metaphysics of morals. New York: Cambridge University Press.Google Scholar
Kim, J., & Mahoney, J. T. 2010. A strategic theory of the firm as a nexus of incomplete contracts: A property rights approach. Journal of Management, 36(4): 806–826.Google Scholar
Klein, B., Crawford, R. G., & Alchian, A. A. 1978. Vertical integration, appropriable rents, and the competitive contracting process. Journal of Law and Economics, 21(2): 297–326.Google Scholar
Knight, F. H. 1921. Risk, uncertainty and profit. New York: Hart, Schaffner and Marx.Google Scholar
Langlois, R. N., & Cosgel, M. M. 1993. Frank Knight on risk, uncertainty, and the firm: A new interpretation. Economic Inquiry, 31(3): 456–465.Google Scholar
Marti, E., & Scherer, A. G. 2016. Financial regulation and social welfare: The critical contribution of management theory. Academy of Management Review, 41(2): 298–323.Google Scholar
McMahon, C. 1994. Authority and democracy: A general theory of government and management. Princeton, NJ: Princeton University Press.Google Scholar
Néron, P. 2015. Rethinking the very idea of egalitarian markets and corporations: Why relationships might matter more than distribution. Business Ethics Quarterly, 25(1): 93–124.Google Scholar
Orts, E. W. 1998. Shirking and sharking: A legal theory of the firm. Yale Law & Policy Review, 16(2): 265–329.Google Scholar
Orts, E. W. 2013. Business persons: A legal theory of the firm. New York: Oxford University Press.Google Scholar
Scott, R. E. 2003. A theory of self-enforcing indefinite agreements. Columbia Law Review, 103(7): 1641–1699.Google Scholar
Simon, H. A. 1955. A behavioral model of rational choice. The Quarterly Journal of Economics, 69(1): 99–118.Google Scholar
Singer, A. 2016. Justice failure: Efficiency and equality in business ethics. Journal of Business Ethics: 1–19.Google Scholar
Smith, A. 1776. An inquiry into the nature and causes of the wealth of nations. London: W. Strahan; and T. Cadell.Google Scholar
Williamson, O. E. 1975. Markets and hierarchies, analysis and antitrust implications: A study in the economics of internal organization. New York: Free Press.Google Scholar
Williamson, O. E. 1985. The economic institutions of capitalism: Firms, markets, relational contracting. New York: Free Press.Google Scholar
Williamson, O. E. 2002. The theory of the firm as governance structure: From choice to contract. The Journal of Economic Perspectives, 16(3): 171–195.Google Scholar
Zingales, L. 2000. In search of new foundations. The Journal of Finance, 55(4): 1623–1653.Google Scholar