Wednesday, March 07, 2012

Maybe Bosses WILL Wear Bunny Slippers?

A while ago I wrote this article, about the nature of the firm. A boss decides it would be cheaper to "fire everybody" and just run the firm from home, in his bunny slippers.

But with reduced transactions costs, one would predict that the optimal size of the firm should shrink. Here is an interesting discussion of just that phenomenon.

Coase himself was agnostic. As he put it:

“A firm will tend to expand until the costs of organising an extra transaction within the firm become equal to the costs of carrying out the same transaction by means of an exchange on the open market or the costs of organising in another firm” (Coase, 1937, p.395).

All you have to do is add "or contract" and you've got it. If transactions costs of buying ptp fall, firm size should fall, cet. par., because there are other costs of organizing within the firm.

(Nod to Robert Eaton, for finding the AVC example)

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