1. Compare and contrast the theories of the firm developed by Alchian & Demsetz and Hart
1. Compare and contrast the theories of the firm developed by Alchian & Demsetz and Hart.
Property rights is the focus of Alchian and Demsetz's Theory of the firm, it considers the possibility that, when output is commonly shared, individuals faces the incentive to shirk as it is often difficult to observe individual output, and the consequence of shirking is bared by all members of the team. Hence monitoring and supervision is required in team production. Given the cost of monitoring and supervision,
They argued that the the contractual structure arises as a mean of enhancing efficient organization of team production.
Alchian and Demsetz implied that the best monitor for the team would be the residual holder, as the cost of him disciplining himself in monitoring is low relative to the cost of metering the marginal output of team members.
Alchian and Demsetz developed their own theory, based on joint production and monitoring. Transactions involving joint or team production require careful monitoring so that each actor's contribution can be assessed. According to Alchian and Demsetz, the best way to provide the monitor with appropriate incentives is to give him the following bundle of rights, which effectively define ownership of the capitalist firm: 1) to be a residual claimant; 2) to observe input behavior; 3) to be the central party common to all contracts with inputs; 4) to alter membership of the team; and, 5) to sell rights 1-4.
Criticism:
it is unclear why the problems of joint production and monitoring must be solved through the firm and cannot be solved through the market. Market solutions for these problems: auditing between individual contractors.
Hart's thoery of the firm, focus on ex post division of residuals and ownership of physical assets as this grants the party bargaining power in a merger, which in turn affects the incentives for individual agents to invest in the relationship. In particular, the employer can deprive the
Property rights is the focus of Alchian and Demsetz's Theory of the firm, it considers the possibility that, when output is commonly shared, individuals faces the incentive to shirk as it is often difficult to observe individual output, and the consequence of shirking is bared by all members of the team. Hence monitoring and supervision is required in team production. Given the cost of monitoring and supervision,
They argued that the the contractual structure arises as a mean of enhancing efficient organization of team production.
Alchian and Demsetz implied that the best monitor for the team would be the residual holder, as the cost of him disciplining himself in monitoring is low relative to the cost of metering the marginal output of team members.
Alchian and Demsetz developed their own theory, based on joint production and monitoring. Transactions involving joint or team production require careful monitoring so that each actor's contribution can be assessed. According to Alchian and Demsetz, the best way to provide the monitor with appropriate incentives is to give him the following bundle of rights, which effectively define ownership of the capitalist firm: 1) to be a residual claimant; 2) to observe input behavior; 3) to be the central party common to all contracts with inputs; 4) to alter membership of the team; and, 5) to sell rights 1-4.
Criticism:
it is unclear why the problems of joint production and monitoring must be solved through the firm and cannot be solved through the market. Market solutions for these problems: auditing between individual contractors.
Hart's thoery of the firm, focus on ex post division of residuals and ownership of physical assets as this grants the party bargaining power in a merger, which in turn affects the incentives for individual agents to invest in the relationship. In particular, the employer can deprive the