Patrick Warren
Clemson U.



(Thursday, 24th May 2012)

Title : The Boundries of the (Non-Firm) Organization

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Economists have studied the determinants of the boundary of the profit-maximizing firm for many decades, and the theoretical and empirical literature is very robust and developed (Lafontaine & Slade, 2007). The positive and normative analsyis of the boundaries of other sorts of organizations is not nearly as well developed. Some of the techniques developed in our theory of the firm have been sucessfully applied to understanding the boundries of the government. The boundaries of other sorts of orgnizations, such as non-profit firms, have hardly been explored at all. In this seminar, I’ll briefly review three dominant theories of the firm, and discuss their applications to other sorts of organization. We’ll look at several recent successful applications to the make-or-buy decision in governments, and discuss the modifications required to take these approaches to other organizations.

The first paper below is an excellent summary of the state of the art in the theory of the firm. It divides the dominant models into three camps: contracting/transaction costs, moral hazard, and property rights. Each paper after that is an application of one such model to the boundries of government.

Bibliographical references :

Lafontaine, F. and M. Slade "Vertical Integration and Firm Boundaries: The Evidence" Journal of Economic Literature, 45: 629–685, 2007. (Overview)

Levin, J. and S. Tadelis "Contracting for Government Services: Theory and Evidence from U.S. Cities," Journal of Industrial Economics, 58(3):507–541, 2010. ("Contracting Costs")

Martimort, D. and Pouyet, J. "To Build or Not to Build: Normative and Positive Theories of Public-Private Partnerships" International Journal of Industrial Organization, 26: 393–411, 2008. (“Multitask Moral Hazard”)

Hart, O., Shleifer, A., and Vishny, R., “The Proper Scope of Government: Theory and an Application to Prisons,” Quarterly Journal of Economics, 112(4), pp. 1127–1161, 1997. (“Property Rights”)