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Original and Derived Judgment An Entrepreneurial Theory of Economic Organization

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  • Kirsten Foss
  • Nicolai J. Foss
  • Peter G. Klein

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.

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Bibliographic Info

Paper provided by DRUID, Copenhagen Business School, Department of Industrial Economics and Strategy/Aalborg University, Department of Business Studies in its series DRUID Working Papers with number 06-09.

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Date of creation: 2006
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Handle: RePEc:aal:abbswp:06-09

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Web page: http://www.druid.dk/

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

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References

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Citations

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Cited by:
  1. Peter Lewin & Howard Baetjer, 2011. "The capital-based view of the firm," The Review of Austrian Economics, Springer, vol. 24(4), pages 335-354, December.
  2. Foss, Nicolai J. & Klein, Peter G. & Kor, Yasemin Y. & Mahoney, Joseph T., 2006. "Entrepreneurship, Subjectivism, and the Resource-Based View: Towards a New Synthesis," Working Papers 06-0121, University of Illinois at Urbana-Champaign, College of Business.
  3. Bijman, Jos & Doorneweert, Bart, 2008. "Entrepreneurship, Collective Entrepreneurship and the Producer-Owned Firm," 2008 International Congress, August 26-29, 2008, Ghent, Belgium 43960, European Association of Agricultural Economists.
  4. Jürgen Wandel, 2011. "Business groups and competition in post-Soviet transition economies: The case of Russian “agroholdings”," The Review of Austrian Economics, Springer, vol. 24(4), pages 403-450, December.
  5. Kraaijenbrink, Jeroen & Spender, JC & Groen, Aard, 2009. "The resource-based view: A review and assessment of its critiques," MPRA Paper 21442, University Library of Munich, Germany.

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