The Theory of Business Transaction and the Boundaries of the Firm
16 Pages Posted: 20 Jun 2018
Date Written: June 6, 2018
When Ronald Coase wrote his seminal article on the nature of the firm, it set off a new field of economics – the neo institutional economics and lately called transaction cost economics. With its growth, it has interfaced with organizational theory, since the question-why do firms exist is central to it. Over time various variants of the theory of the firm have surfaced trying to settle this question in terms of principal – agent mechanisms or mechanisms of incomplete contracts. With evolution of production and information technologies and the rising dominance of the resource based view, new forms of production and organizational structures have only complicated the issue as to what determines the boundaries of a firm.
Since transactions are at the centre of the discussions, we link it to the concept of organization and study the process of transactions covering production, exchange and consumption. We integrate the behavioral, organizational and transaction parts of the process to create a theory of business transactions.
Following Simon, we take households as the final point of consumption while firms and households are production centers under various conditions. Markets are where the exchanges occur. Critically we believe firms are meant to generate revenues from exchanges and assure future wages to their members for final consumption and survival. The boundaries of a firm are determined by the nature of governance mechanisms used to link production and resource distribution mechanisms to the firm. Thus a firm exists to generate resources to ensure production and future household consumption.
Keywords: business transactions, production, revenue generation, firm failure
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