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The Firm as a Socialization Device

  • Abhijit Ramalingam

    ()

    (School of Economics, University of East Anglia, Norwich NR4 7TJ, United Kingdom)

  • Michael T. Rauh

    ()

    (Kelley School of Business, Indiana University, Bloomington, Indiana 47405)

Why do firms exist? What is their function? What do managers do? What is the role, if any, of social motivation in the market? In this paper, we address these questions with a new theory of the firm, which unites some major themes in management, principal-agent theory, and economic sociology. We show that although the market is a superior incentive mechanism, the firm has a comparative advantage with respect to social motivation. We then show that the market is efficient in environments that favor the provision of incentives, such as when subjective risk is low and performance is easy to measure. The firm is efficient in other environments where incentives are costly and/or ineffective. We compare our model and results with the views of Durkheim (Durkheim, E. 1984. The Division of Labor in Society. Free Press, New York) and Granovetter (Granovetter, M. 1985. Economic action and social structure: The problem of embeddedness. Amer. J. Sociol. 91(3) 481-510).

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File URL: http://dx.doi.org/10.1287/mnsc.1100.1239
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Article provided by INFORMS in its journal Management Science.

Volume (Year): 56 (2010)
Issue (Month): 12 (December)
Pages: 2191-2206

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Handle: RePEc:inm:ormnsc:v:56:y:2010:i:12:p:2191-2206
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  25. George Baker & Robert Gibbons & Kevin J. Murphy, 2002. "Relational Contracts and the Theory of the Firm," The Quarterly Journal of Economics, Oxford University Press, vol. 117(1), pages 39-84.
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  28. Mark Granovetter, 2005. "The Impact of Social Structure on Economic Outcomes," Journal of Economic Perspectives, American Economic Association, vol. 19(1), pages 33-50, Winter.
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