Corporate Culture as a Theory of the Firm

67 Pages Posted: 25 Jun 2020

See all articles by Gary B. Gorton

Gary B. Gorton

Yale School of Management; National Bureau of Economic Research (NBER); Yale University - Yale Program on Financial Stability

Alexander Zentefis

Yale School of Management

Multiple version iconThere are 2 versions of this paper

Date Written: June 2, 2020

Abstract

Markets and firms offer contrasting methods to arrange production. In markets, contracts govern the purchase of parts and services that compose production. In firms, the shared values, customs, and norms coming from a corporate culture govern employees’ joint development of those parts and services. We argue for this distinction as a theory of the firm. Firms exist because corporate culture at times is more efficient at carrying out production than detailed contracts. The firm’s boundary encircles the parts of production for which a manager optimally chooses corporate culture as the organizing device. The model can explain why some mergers and acquisitions fail, in a way consistent with empirical evidence, and why corporate cultures are hard to change.

Keywords: Corporate culture, theory of the firm

JEL Classification: D23, L22, M14

Suggested Citation

Gorton, Gary B. and Zentefis, Alexander, Corporate Culture as a Theory of the Firm (June 2, 2020). Available at SSRN: https://ssrn.com/abstract=3617705 or http://dx.doi.org/10.2139/ssrn.3617705

Gary B. Gorton (Contact Author)

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National Bureau of Economic Research (NBER)

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Yale University - Yale Program on Financial Stability

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Alexander Zentefis

Yale School of Management ( email )

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New Haven, CT 06520-8200
United States

HOME PAGE: http://som.yale.edu/alexander-zentefis

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