Theory of the Firm

obligatory courses

The purpose of the lecture is to present alternative firm theories. The neoclassical theory adopts many simplifying assumptions (e.g. that the market is the perfect mechanism for allocation of goods, the firm is made of up inputs and outputs (“black box”), the objective of the firm is to maximise profit, and transaction costs do not exist), which means that its usefulness is limited when it comes to researching, explaining or predicting the behaviour of firms.

Firms, however, make up approx. 70% of GDP and employ approx. 60% of the people working in the economy, and the way in which inputs are transformed into products is critical to the development of this economy.

Alternative theories develop firm models that combine the neoclassical approach with other variables determining the functioning of a firm.

During the lecture, Students will have the opportunity to discuss the impact of the following issues on the operation of firms, in particular: degree of ownership concentration, asymmetry of information, property rights, behaviours, motivations and aspirations of entities connected with the firm, conflicts, opportunism in behaviours of economic entities and related transaction costs, specific resources owned by the firm, attitude towards innovation and institutional factors.

The lecture will present alternative firm theories while referring to examples of functioning firms.

Introduction – business sector in the Polish economy (number and structure of firms broken down by size and sector, share in GDP, employment, investments and changes over time). The introduction will provide the actual background for the lecture.

Definition and models of the firm – neoclassical theory and alternative firm theories.

Stages of development of the theory of the firm – from A. Smith to alternative theories. Causes for the evolution of views and theories concerning the firm. Alternative concepts – continuation of the neoclassical theory, development of the neoclassical theory or foundations for a new theory of the firm.

Dispute about the objectives of the firm. Managerial theories (theory of W. J. Baumol, R. Marris and O. E. Williamson). Maximisation of managerial utility function.

Efficiency gap – Leibenstein’s X-Efficiency concept. Selective rationality of managers and employees.

J. Schumpeter’s theory of entrepreneurship and innovation. Indivisibility of entrepreneurship. Theory of innovation waves.

Internal rules of the game. Behavioural theories of the firm. Aspiration level. Satisficing behaviours. Bounded nature of rationality.

Homeostatic balance between the firm and its environment. Biological theories. Firm life cycle.

Institutional economics and new institutional economics. Interdisciplinary approach to the analysis of market relationships. Significance of the institution in economic activity.

External rules of the game. Theory of property rights – definition and nature of property rights, property rights and external effects, economic value of property rights. Property right and efficient allocation of resources. Property rights in the context of the asymmetry of information and transaction costs.

Agency theory. Economic meaning of the employment relationship, owner-manager relationship. Asymmetry of information, conflict of interest, opportunistic behaviours. Contracts to define conflict-of-interest rules.

Theory of transaction costs. Market coordination vs firm coordination. R. Coase and limits of the firm. E. O. Williamson and transaction costs in the context of the management structure. Types of contractual relationships.

Competence-based theories of the firm. Resource-based theory (firm strength – specificity of assets), knowledge-based theory of the firm.

New trends in the functioning of firms. Globalisation. Place in the global value chain. New technologies. Labour market.

Literature (obligatory):

1. T.Gruszecki (2002), Współczesne teorie przedsiębiorstwa, PWN

2. A.Noga (2009), Teorie przedsiębiorstw, PWE

3. M.Rickets (1994), The Economic of Business Enterprise, Harvester Wheatheaf, New York

Literature (supplementary):

1.G.C.Archibald (1971), The Theory of the Firm, Penguin Books, Harmondsworth

2.R.M.Cyert, J.G.March (1992), A Behevioral Theory of the Firm, Blackwell Business, Cambridge

3.R.Coase (1986), The Nature of the Firm, w: The Economic Nature of the Firm. A Reader, Cambridge University Press

5.P.F.Drucker (1992), Innowacja i przedsiębiorczość. Praktyka i zasady, PWE

6.The Elgar Companion to Institutional and Evalutionary Economics (1994), G.M.Hodson, W.J.Samuels, M.R.Tool (I,II), Brookfield, Aldershot, Hants

7.P.Ferguson, G.J.Ferguson, R.Rotschild (1993), Business Economics. The Application of Economical Theory, Macmillan, London

8. U.Gorzelańska (1999), O instytucjonalnej i alternatywnych teoriach przedsiębiorstwa, w: Gospodarka w okresie przemian, Oficyna Wydawnicza SGH

9. T.Gruszecki (1996), Niejasności wokół przedsiębiorstwa: jedna czy wiele teorii przedsiębiorstwa?, PTE

10.T.Gruszecki (1989), Przedsiębiorstwo jako teoria ekonomiczna, w: Teoria i praktyka przemian gospodarczych, pr.zb. Ossolineum

11. Ł.Hardt (2009), Ekonomia kosztów transakcyjnych – geneza i kierunki rozwoju, Wyd. UW

12. M.Moschandreas (1994), Business Economics, Routledge

13. D.Kahneman (2012), Pułapki myślenia, Media Rodzina

14. A.Noga (1996/6), Cele przedsiębiorstwa. Kontrowersje teoretyczne, Ekonomista

15. D.P.O'Brien (1984), The Evaluation of the Theory of the Firm, w: Firms, Organization and Labour, Macmillan

16. E.T. Penrose (1959), The theory of the Growth of the Firm, Blackweel, Oxford

17. E.O.Williamson (1998), Ekonomiczne instytucje kapitalizmu. Firmy, rynki, relacje kontraktowe, PWN

18. T.Veblen, The Theory of Business Enterprises, C.Scribner's Sons

The Student will become proficient in the following areas:

a) knowledge

understanding the reasons for criticism of the neoclassical theory of the firm and its cognitive limitations as well as the reasons for the formation of alternative theories of the firm, including the need to introduce qualitative variables into the theory of the firm;

significance of the entrepreneur as a factor of production;

dispute about the usefulness of profit maximisation in the explanation and prediction of firm behaviours;

restrictions on firm rationality;

significance of individual motivations of firm members, their aspiration level and the satisficing rather than optimising nature of firm decisions to the operation of the firm;

significance of innovation in the development of the firm and the economy;

significance of institutions influencing the rules for economic transactions;

significance of the nature of property rights to the efficiency of the firm and its economic value;

significance of opportunism in firm behaviours to the shaping of transaction costs;

impact of firm resources, including knowledge, skills and experience, on firm growth;

trends of changes in the functioning of firms.

b) skills

The Student will be able to:

explain the reasons why resource allocation at the firm is coordinated based on decisions of firm management rather than by the market;

indicate firm objectives other than profit maximisation and their origins;

indicate external and internal conditions of firm functioning, including, in particular: significance of innovation, behaviours of individual entities acting within the firm, their aspiration level, conflicts between firm owners and managers, impact of property rights on firm efficiency and market value, consequences of opportunism to firm behaviours, impact of specific firm resources on firm operations;

explain the reasons for choices made by firms.

c) social skills

The Student will:

be aware of the significance of firms in the economy and importance of the problems related to their functioning;

be able to think like the owner of the firm and manager of the firm and be able to understand how objectives are defined and choices are made at the firm;

be aware of the impact of decisions made by firm owners and managers on the macro- and micro-economic area.

S_W01, S_W02, S_W03, S_W04, S_U01, S_U02, S_U03, S_U04, S_K01

Students will be graded based on a final written exam. By preparing and presenting a selected aspect/issue relating to one of the discussed alternative theories during the lecture, the Student will add an extra 0.5 to the grade received during the final written exam.

The written exam will be a single-choice test. The test will primarily be based on short cases. Grade required to pass – 50% + 1 point.

Presentation of a selected topic relating to the discussed theories of the firm during the lecture by the Students (selected at their discretion) will add 0.5 to the final grade.