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On the Nature and Scope of the Firm: An Adjustment-Cost Theory

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Author Info
Wernerfelt, Birger

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Abstract

The author compares the alternative game forms for situations where a buyer needs a sequence of human asset services. The hierarchy is defined as a game form in which the parties engage in once-and-for-all wage negotiation, the boss describes desired services sequentially, and either party may terminate the relationship at will. If many diverse and frequent adjustments are needed, this involves lower adjustment costs than any alternative game form. The price list game form is better when the list of possible adjustments is small and the negotiation-as-needed game form is better when adjustments are needed infrequently. An empirical test supports the theory. Copyright 1997 by University of Chicago Press.

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File URL: http://links.jstor.org/sici?sici=0021-9398%28199710%2970%3A4%3C489%3AOTNASO%3E2.0.CO%3B2-I&origin=repec
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Publisher Info
Article provided by University of Chicago Press in its journal Journal of Business.

Volume (Year): 70 (1997)
Issue (Month): 4 (October)
Pages: 489-514
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Handle: RePEc:ucp:jnlbus:v:70:y:1997:i:4:p:489-514

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  1. Nicolai J. Foss, 1997. "Incomplete Contracts and Economic Organization Brian Loasby and the Theory of the Firm," DRUID Working Papers 97-11, DRUID, Copenhagen Business School, Department of Industrial Economics and Strategy/Aalborg University, Department of Business Studies. [Downloadable!]
  2. Kirsten Foss, 1998. "Technological Interdependencies,Specialization and Coordination A Property Rights Perspective on The Nature of the Firm," DRUID Working Papers 98-10, DRUID, Copenhagen Business School, Department of Industrial Economics and Strategy/Aalborg University, Department of Business Studies. [Downloadable!]
  3. Steven Tadelis, 2002. "Complexity, Flexibility, and the Make-or-Buy Decision," American Economic Review, American Economic Association, vol. 92(2), pages 433-437, May. [Downloadable!]
  4. Kirsten Foss & Nicolai J. Foss & Peter G. Klein, 2006. "Original and Derived Judgment An Entrepreneurial Theory of Economic Organization," DRUID Working Papers 06-09, DRUID, Copenhagen Business School, Department of Industrial Economics and Strategy/Aalborg University, Department of Business Studies. [Downloadable!]
  5. Wernerfelt, Birger, 2004. "Robust Incentive Contracts," Working papers 4448-03, Massachusetts Institute of Technology (MIT), Sloan School of Management. [Downloadable!]
  6. Kirsten Foss & Nicolai J. Foss, 1998. "The Market Process and The Firm Toward a Dynamic Property Rights Perspective," DRUID Working Papers 98-14, DRUID, Copenhagen Business School, Department of Industrial Economics and Strategy/Aalborg University, Department of Business Studies. [Downloadable!]
  7. Pierre Azoulay, 2004. "Capturing Knowledge within and across Firm Boundaries: Evidence from Clinical Development," American Economic Review, American Economic Association, vol. 94(5), pages 1591-1612, December. [Downloadable!]
  8. Pierre Azoulay, 2003. "Acquiring Knowledge Within and Across Firm Boundaries: Evidence from Clinical Development," NBER Working Papers 10083, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  9. Oliver Hart & John Moore, 2006. "Contracts as Reference Points," NBER Working Papers 12706, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  10. Wernerfelt, Birger, 2003. "Organizational Languages," Working papers 4278-03, Massachusetts Institute of Technology (MIT), Sloan School of Management. [Downloadable!]
    Other versions:
  11. Wernerfelt, Birger, 2003. "Resources, Adjustments, and Diversification: Evidence from Production Functions," Working papers 4277-03, Massachusetts Institute of Technology (MIT), Sloan School of Management. [Downloadable!]
  12. Nicolai J. Foss, 2002. "'Coase vs Hayek': Economic Organization and the Knowledge Economy," International Journal of the Economics of Business, Taylor and Francis Journals, vol. 9(1), pages 9-35, February. [Downloadable!] (restricted)
    Other versions:
  13. Jukka Kaisla, . "Extending the Constitutional Theory of the Firm by Introducing Conventions," IVS/CBS Working Papers 2001-10, Department of Industrial Economics and Strategy, Copenhagen Business School. [Downloadable!]
  14. Sharon Gifford, 2004. "To Make or Buy: An Allocation of Attention," Contributions to Theoretical Economics, Berkeley Electronic Press, vol. 4(1), pages 1144-1144. [Downloadable!] (restricted)
  15. Oliver Hart, 2007. "Hold-up, Asset Ownership, and Reference Points," NBER Working Papers 13540, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  16. Kam Ki Tang & Leopoldo Yanes, 2008. "The Hierarchical Structure of the Firm: A Geometric Perspective," Discussion Papers Series 362, School of Economics, University of Queensland, Australia. [Downloadable!]
  17. Wernerfelt, Birger, 2003. "Indirect Adjustment-Costs Under Alternative Coordination Regimes," Working papers 4336-01, Massachusetts Institute of Technology (MIT), Sloan School of Management. [Downloadable!]
  18. Wernerfelt, Birger, 2003. "Governance of Adjustments," Working papers 4412-03, Massachusetts Institute of Technology (MIT), Sloan School of Management. [Downloadable!]
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