Question 1
Coase, Ronald. (1937). The Nature of the Firm. Economica, 4(16), pp 386-405. I. How does the modern corporate firm emerge and why? According to Coase, firm is the system of relationships which comes into existence when the direction of resources is dependent on the entrepreneur. A modern corporate firm emerges when the entrepreneur of some sort begins to hire people. Some people prefer to be the leader while some prefer to be leaded. Individuals that prefer to work under direction of some other person would accept less in order to work under someone, and firms would emerge naturally from this. The hierarchical organization can simply be desired for its own sake. People might be willing to give up something so that they can direct others if the desire wasn’t to be controlled but to control, to exercise power over others. It means that they would be willing to pay others more than they could actually get under the price mechanism in order to be able to direct them. Also, firms might emerge if purchasers preferred commodities which are produced by firms to those not produced. However, transaction costs are involved in using the market. The price of the goods is actually lower than the cost of getting a goods or services through the market. Other necessary costs likes search & information costs, policing & enforcement costs, bargaining costs, and keeping trade secrets, can be added to the cost of procuring something from another party. This suggests that firms will emerge which can internalise the production of goods and services required to deliver a product, so that avoiding these costs. This argument sets the stage for the later contributions by Oliver Williamson: Markets and hierarchies are alternative co-ordination mechanisms for economic transactions. The real world is full of uncertainty that prevents the price mechanism from achieving the