Problem of Economic Organization Aim: Introduce the notion of an efficient organization, i.e. an organization that produces efficient outcomes. Are firms controlled by the shareholder voice efficient economic organizations?

Partnership the general partners both own and exercise management the partners cannot sell or otherwise transfer their ownership claims without permission of the other partners there are no markets for corporate control connected to the partnership form when borrowing money each partner is individually responsible for the entire liabilities (“passiver”) and the liability is unlimited

Advantages of partnership the costs of monitoring are low. Unlimited liability encourages the partners to efficiently monitoring the business operations. only in service businesses the employees have the qualifications and information necessary to manage specialized knowledge assets (tacit knowledge embedded in people) in case of human capital, which usually is not tradable (limitations on intellectual property)

Economic organizations Entities within and through which people interact to reach individual and collective goals Contractual view: An organisation (firm): a nexus of contracts a legal fiction that enters into bilateral contracts between itself and its suppliers, workers, investors managers and customers.

Efficient performance Efficient choice (outcome of economic processes) There is no available alternative that is universally preferred in terms of the goals and preferences of the people involved Efficiency of organizations Properties of organizations such as the bargaining procedures people use to seek out ‘efficient choices’ and to implement and enforce their choices

Transaction Cost Approach to analysing ‘efficiency of organizations Differences in attributes of transactions are a source of misunderstanding and conflict, which are managed differently with various transaction costs in different organizational settings

Design of an efficient organization Choose an organizational form that - as far as possible - minimize transaction costs and produces efficient outcomes The efficiency principle If people are able to bargain together effectively and can effectively implement and enforce their decisions, then the outcomes of economic activity will tend to be efficient.

The Coase theorem Is it possible to define an efficient bargaining organization, where the division of income from ownership has no influence on the outcome. The utility function must have certain properties Are they realistic? ui: The utility of two contractual parties i=1,2 y: Total input provided by the two parties γi: Costs for individual i x: Total income in cash generated by the investment P: The value creating process in the firm

No Wealth Effect 1.Individual parties evaluate the benefits they receive and costs and risks they bear as being equivalent to some cash transfer 2.These evaluations do not depend on the amount of wealth they hold 3.People are able to make payments in whatever amounts required to divide the benefits of the transaction without affecting the costs or feasibility of any other aspect of the transaction.

Example: Two actions: 1) organize all activities in one large firm 2) decentralize the activities to a large number of small one- person firms.