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Production, Information Costs, and Economic Organization

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

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Production, Information Costs, and Economic Organization

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  1. Production, Information Costs, and Economic Organization ArmenAlchian & Harold Demsetz - 1972

  2. 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)

  3. 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”?

  4. 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?”

  5. 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 100lb box • Does each person lift 50lbs? • Does one lift 75lb and the other 25lb? • How does a team lead to a firm?

  6. 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

  7. 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

  8. 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”

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