Institutional theory of the firm? Extension and limitation

Abstract

I try to argue that the new institutional theory of the firm provides fruitful insights into the question of the market/firm continuity. However, it should not be oversold as the sole foundation of the theory of the firm. In light of the institutional perspective, it is possible to uphold the market/firm continuity thesis while repudiating the exchange paradigm á la Alchian and Demsetz. An extended institutional approach could support the continuity thesis on the basis that interfirm exchange is underpinned by institutions as much as intrafirm exchange is underpinned by implicit and explicit contracts. However, the set of institutions and cultural norms is insufficient to qualify the firm as an organizational individual. Otherwise, any asset-specific or institutionally constrained relations among firms, cartels and inter-state treaties should also be considered individuals like firms and households. This indicates that organizations, like firms and households, are more than the nexuses of treaties or the sets of institutions. I conclude with the suggestion that the theory of the firm should be based on the idea of ‘common goal’ — which unites the members in a way different from the familiar idea of ‘mutual interests’.

^∗The author has benefited, without implications of responsibility, from the comments of Viktor Vanberg, Douglas Jones and John Munkirs, and two anonymous referees.

^∗The author has benefited, without implications of responsibility, from the comments of Viktor Vanberg, Douglas Jones and John Munkirs, and two anonymous referees.

Notes

^∗The author has benefited, without implications of responsibility, from the comments of Viktor Vanberg, Douglas Jones and John Munkirs, and two anonymous referees.