Economics 144

Economics 144

Economic Theories of Firms

Professor Louis Putterman = &nb= sp; = &nb= sp; = &nb= sp; Fall, 2005

Robinson Hall 206, x33837

e-mail: Louis_Putterman@Brown.Edu

Office Hours: M, 1:30-2:20 and W, 2:30-3:20 and by appointment.

Teaching assistant: Yukiko Ito, e-mail: Yukiko_Ito@Bro= wn.Edu

Description: This course looks at firms in the abstrac= t as modes of economic organization or coordination, and opens the concept of the firm up to look at the internal organizational and motivational challenges which they face from the standpoint of economic theory. We examine theories of why firms e= xist, employment relationships and the motivation of employees, questions of owne= rship and control, control of managerial malfeasance, and alternative organizatio= nal forms, such as the proprietorship and the corporation, and employee ownersh= ip and profit-sharing. We read original papers written for economists, rather than a textbook. Most of the material consist= s of verbal expositions of issues in economic theory, but a few units make use of graphs, algebra, and the notation of differential calculus. Class attendance and participation= are required.

Prerequisites: Economics 111 or 113.

Requirements and Grading: Three in-class exams (18%), = class participation (10%), final exam (36%).&nbs= p; Students are expected to attend class and will be called upon to ans= wer questions regarding the assigned reading.&= nbsp; The exams will consist of roughly 2/3 multiple choice or other short answer and 1/3 essay questions.

Reading: Most of the assigned reading is contained in The Economic Nature of the Firm: A Reader, 2nd Edition, 1996, edited by Louis Putterman and Randall S. Kroszner. There is also a packet of addition= al required readings, and a supplementary book, Paying for Productivity. All are available for purchase at Brown Bookstore.

Schedule: Regular meetings when classes are in session= , MWF, 10:00-10:50

&nbs= p; No class meeting= , Wednesday October 5

&nbs= p; First in-class e= xam: Friday, Oct. 7

&nbs= p; Second in-class = exam: Wed., Oct. 26

Third in-class e= xam: Wed., Nov. 16

&nbs= p; Final exam: Mond= ay, Dec. 12, 9 a.m.

Syllabus

1. Introducti= on

&nb= sp; The Reader introduction = by Putterman and Kroszner may be browsed now but should be read at the conclus= ion of the course.

Part I: Firms= and markets.

2. Early classics

&nb= sp; Read Smith and Marx in Reade= r.

3. Later classics

Read Hayek= and Knight in Reader.

4. Relational exchange, and hierarchy

Read Goldb= erg and Chandler in Reader.

5. Why are there firms?: Coase’s approach

Read Coase= in Reader.

6. Why are there firms?: Williamson’s TCE approa= ch

Read Klein, Crawford & Alchian and first Williamson chapter in Reader.

7. Between firms and markets

&nb= sp; Read Richardson in Reader.

8. Limits to firm expansion

&nb= sp; Read second Williamson chapter, Milgrom & Roberts, and Teece in = Reader.

Part II: The employment relation (the manager-worker agency problem).

9. The employment relation

&nb= sp; Read the excerpt from Herbert Simon, “A Formal Theory of the Employment Relationship,” Eco= nometrica, 1951, in course packet.

10. Shirking and monitoring

&nb= sp; Read Alchian & Demsetz and Bowles & Gintis in Reader.

&nb= sp; Read Dumaine, “Who Needs a Boss?” Fortune, May 7, 1990, in packet.

Shapiro and Stiglitz, “Equilibrium Unemployment as a Worker Discipline Device,” will be discussed in lec= ture but is not included in the readings.

11. Idiosyncratic exchange

&nb= sp; Read Williamson, Wachter & Harris in Reader.

&nb= sp; Read Richard Freeman, “Individual Mobility and Union Voice in = the Labor Market,” American Econo= mic Review, 1976, in packet.

12. More shirking and monitoring

Read Holms= trom & Milgrom in Reader.

13. Norms and gifts

Read Leibenstein and Akerlo= f in Reader.

Opti= onal: Leibenstein: “Allocative Efficiency and X-Efficiency,” American Economic Review, 1976.

14. Profit sharing

&nb= sp; Read Weitzman & Kruse in Reader.

&nb= sp; Read Baker, Jensen & Murphy, “Compensation and Incentives: Practice vs. Theory,” Journal= of Finance, 1988, in packet.

Part III: Fin= ance and control (the owner manager agency problem).

15. Controlling managerial shirking

&nb= sp; Read Manne, Fama, and Jensen & Meckling in Reader.

&nb= sp; Read Fama and Jensen, “Separation of Ownership and Control,= 221; Journal of Law and Economics, 198= 3, in packet.

16. Choosing organizational form

Read Fama = and Jensen (1985) and Demsetz (1983) in Reader.

17. Explaining ownership and control

Read Hart = in Reader.

Read Willi= amson, “Corporate governance,” Yale Law Journal, 1984, in packet.

Read Putte= rman, “Ownership and the Nature of the Firm,” in Reader.

Part IV: “Nonstandard” firms

18. Nonprofit firms

Read Ben-Ner and Hoomissen, “Nonprofit Organizations in the Mixed Economy: A Demand and Supply Analysis,” Annals of Public a= nd Cooperative Economics, 1991, in packet.

19. Socialist firms

Read Kornai, “The Sof= t Budget Constraint,” Kyklos, 1988= , in packet.

Take a look at Furubotn and Pejovich, “Property Rights and the Behavior of the Firm in a Socialist State: The Example of Yugoslavia,&= #8221; Zeitschrift fur Nationalokonomie, 1982, which is in the packet. Try to understand the nature of “the horizon problem” which they identify and which we will discuss in class. You are not responsible for the ma= th and graphs in this paper.

20. Profit-sharing, participation, and cooperative fir= ms.

       (a) = Read the introduction to Alan Blinder, ed., Paying for Productivity, 1990.

       (b) = Read either

        =      (i) any two chapters in Blinder’s book, or

        =      (ii) one chapter in Blinder’s book and Rosner and Putterman, “Factors Behind the Supply and Demand for Less Alienating Work,”= ; Journal of Economic Studies, 1991,= in packet.

21. Conclusion

   &nb= sp; Read Putterman and Kroszner’s introduction to the Reader.