Illiquidity and the Theory of the Firm: An Exploration of a New Perspective

Abstract

Illiquidity has a negative connotation (Tirole (2011)). We focus on the neglected 'bright' side of illiquidity: glue. We argue that the economic forces leading to or supporting illiquidity are key to the theory of the firm. Accumulated skills of agents are always threatened by competition. Firms emerge as powerful solutions to these kind of problems, since they may be interpreted as tools to mutually insure economic agents temporarily from competition by providing a short-term stable but long-term fragile environment built on illiquid resources. In short: firms can be interpreted as illiquid, self-enforcing entities.

Keywords: Theory of the firm, illiquidity, complementarities, skills, competition, imperfect information, real options, path dependence, communication codes, corporate culture

JEL Classification: D23, G3, L36