The Firm In Search Of Its Nature

• Date: 01 March 2019
• DOI: http://doi.org/10.1111/emre.12178
• Published date: 01 March 2019
• Author: Anna Grandori

TheFirmInSearchOfItsNature

ANNA GRANDORI

Department of Management and Technology, BocconiUniversity, Milan, Italy

This paper argues that the notions of ‘the nature of the firm’prevailing in economics and management, in the

course of having contributed to some distorsions in firm behavior via some biased assumptions, fall short of a core

task: providing a clear specification of the traits distinguishing a firm from other organized entities. Paradoxically,

the available theory of the firm does not say what precisely a firm is. Hence, in a first pars destruens, the paper

identifies fourmain biases in the assumptionsof available theories of the firm:pro central planning bias,association

neglect, reification and teleologism. The second pars construens identifies four minimal necessary and sufficient

elements for having a firm: continuous association and dedication of assets, legal personhood and erga omnes

responsibility, constitutional contracting, and property right sharing. The third part draws implications for an

expanded theory of economic organization and for improved firm governance practices.

Keywords: Theory of the firm; constitutional contracts; responsibility; property rights

Introduction

This article intervenes on two related open problems and

discussions. The first issue is that something seems to be

wrong in contemporary thought and practice about the

firm and its governance. Many micro misbehaviors at

the firm level seem to have contributed to the macro

economic crisis: scandals, failure s (or salvages at the

expenses of the general public), bonuses in the face of

mismanagement, tesaurization rather than productive use

of wealth, contributed to generate massive disequalities

and the re-emergence of poverty in affluent societies.

But what precisely is not working? And, consequently,

which are theadequate remedies? Do the mainperpectives

in management that have addressed those questions –

most notably the ‘social responsibility’and ‘stakeholder’

perspectives –provide adequate answers? An implication

of the analysis that will be conducted in this paper is that

those alternative views do not revise sufficiently the

‘baseline’notion of the firm, but rather ‘add’corrections

(e.g., not only profit but also other objectives, not only

shareholders, but also other stakeholders).

The second, related, issue is that what a firm precisely

is, is still surpringly unclear. We do have (various)

‘theories of the firm’(Gibbons, 2005). They were born

mostly in economics, and mostly in the US - namely,

agency theory, transaction cost economics, and property

right theory. In management, and in Europe, they have

either been substantially embraced (e.g., Foss and Klein,

2018), or they have been charged of be the very source

of the above mentioned malfunctioning of the firms

(Ghoshal, 2005). We take here a different approach: a

recognition that received theorie s of the firm, prec isely

for their importance, deserve a discriminating revision

effort, trying to discern where the problems precisely lie.

Is it a matter of domain of application, of misapplication,

of wrong assumptions, of wrong propositions, of wrong

prescriptions? Or is perhaps the world that has changed

while the basic assumptions of those theories remained

the same? The firstsection of the paper is dedicatedto that

analysis and identifies four main ‘bias es’in the commonly

accepted assumptions. In the course of that ‘zero based

review’of the theories of the firm, another problem is

encountered and addressed: the surprising fact that none

of them actually provides a specification of what bundle

of attributes defines a firm, as distinguished from other

entities or forms of organization. It will be shown that

the ‘nature of the firm’, in spite of having been heralded

in the title of the first and still foremost contribution in

the ‘theory of the firm’(Coase, 1937), was there left,

and still is, surprisingly underspecified.

In response to that gap, the main contribution of this

article, offered in the second section, is a reconstruction

of the bundle of traits defining a firm. More precisely, it

is asked what the minimal necessary and sufficient traits

Correspondence: Anna Grandori Department of Management and

Technology, Bocconi University, Via Roentgen 1, 20136 Milan, Italy,

Tel.: +39 02 58362637. E-mail anna.grandori@unibocconi.it

European Management Review, Vol. 16, 81–92, (2019)

DOI: 10.1111/emre.12178

©2018 European Academy of Management