Original and Derived Judgement: An Entrepreneurial Theory of Economic Organization

SMG Working Paper No. 8/2006

35 Pages Posted: 24 Apr 2007

See all articles by Kirsten Foss

Kirsten Foss

Copenhagen Business School - Department of Industrial Economics & Strategy (IVS)

Nicolai J. Foss

Copenhagen Business School - Department of Strategy and Innovation

Peter G. Klein

Baylor University - Hankamer School of Business; Norwegian School of Economics (NHH) - Department of Strategy and Management; Ludwig von Mises Institute

Date Written: April 2006

Abstract

Recent work links entrepreneurship to the economic theory of firm using the Knightian concept of entrepreneurship as judgment. When judgment is complementary to other assets, and these assets or their services are traded in well-functioning markets, it makes sense for entrepreneurs to hire labor and own assets. The entrepreneur's role, then, is to arrange or organize the human and capital assets under his control. We extend this Knightian concept of the firm by developing a theory of delegation under Knightian uncertainty. What we call original judgment belongs exclusively to owners, but owners may delegate a wide range of decision rights to subordinates, who exercise derived judgment. We call these employees "proxy-entrepreneurs," and ask how the firm's organizational structure - its formal and informal systems of rewards and punishments, rules for settling disputes and renegotiating agreements, means of evaluating performance, and so on - can be designed to encourage forms of proxy-entrepreneurship that increase firm value while discouraging actions that destroy value. Building on key ideas from the entrepreneurship literature, Austrian economics, and the economic theory of the firm we develop a framework for analyzing the tradeoff between productive and destructive proxy-entrepreneurship. We link this analysis to the employment relation and ownership structure, providing new insights into these and related issues in the economic theory of the firm.

Keywords: Judgment, entrepreneur, delegation, employment relation, ownership

JEL Classification: B53, D23, L2

Suggested Citation

Foss, Kirsten and Foss, Nicolai J. and Klein, Peter G., Original and Derived Judgement: An Entrepreneurial Theory of Economic Organization (April 2006). SMG Working Paper No. 8/2006, Available at SSRN: https://ssrn.com/abstract=982105 or http://dx.doi.org/10.2139/ssrn.982105

Kirsten Foss (Contact Author)

Copenhagen Business School - Department of Industrial Economics & Strategy (IVS) ( email )

Howitzvej 60, 6
Frederiksberg, DK-2000
Denmark

Nicolai J. Foss

Copenhagen Business School - Department of Strategy and Innovation ( email )

Kilen
Frederiksberg, 2000
Denmark

Peter G. Klein

Baylor University - Hankamer School of Business ( email )

Waco, TX 76798
United States
254-710-4903 (Phone)

Norwegian School of Economics (NHH) - Department of Strategy and Management ( email )

Breiviksveien 40
N-5045 Bergen
Norway

Ludwig von Mises Institute ( email )

Auburn, AL
United States

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