PRODUCTION INFORMATION COSTS AND ECONOMIC ORGANIZATION Armen Alchian
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PRODUCTION, INFORMATION COSTS, AND ECONOMIC ORGANIZATION Armen Alchian & Harold Demsetz 1972
ABOUT THE PAPER Authored by: § Armen A. Alchian (University of California, Los Angeles) § Harold Demsetz (University of California, Los Angeles) Published § 1972 by ‘The American Economic Review’ § 1975 by ‘Engineering Management Review’ § 1997 in Readings in Microeconomic Theory (Manfredi La Manna)
ARTICLE OVERVIEW Resources are controlled by non-governmental organizations (firms, households, markets) § Productivity increased through cooperation demand for economic organizations Questions for theory of economic organizations § Under what conditions can the organization or the market provide greater gains from specialization and cooperative production? § What is the structure of the “organization”?
CHARACTERIZATION OF THE FIRM Firms posses the power to “settle issues by fiat, by authority, or by disciplinary action superior to that available in the conventional market”. What separates an employer and an employee from an employer and a customer? § The ‘team’ and the “centralized contractual agent in a team productive process” “Exactly what is a team process and why does it induce the contractual form, called the firm? ”
THE TEAM What makes a team? § The use of several resource types § The product does not equal a sum of individual contributions § Not all resources used by the team belong to one person Think about two people lifting a 100 lb box § Does each person lift 50 lbs? § Does one lift 75 lb and the other 25 lb? How does a team lead to a firm?
THE FIRM Shirking: A problem with the a team § Fixed by using a “Monitor” § § § Residual claimant Observe input behavior Central party common to all contracts Ability to alter team membership Ability to sell these rights (ownership) Therefore, the firm arises when § It is possible to increase production through a team § It is economical to estimate marginal productivity via observation
TYPES OF FIRMS Profit-Sharing Firms § Used for self-policing small teams Socialist Firms § Employee-owned firms; found where government restrictions exist The Corporation § Sells promises of future returns for present financial capital Mutual and Nonprofit Firms § Used for shirking duties Partnerships § Favored for artistic / intellectual ventures Employee Unions § Serve as monitors of employers for employees
SUMMARY Individuals own resources Teams are used to enhance efficient use of inputs “The contractual structure arises as a means of enhancing efficient organization of team production. ” § Leads to the different models of the firm “The firm takes on the characteristic of an efficient market in that information about the productive characteristics of a large set of specific inputs is now more cheaply available”
