Formation And Transition Of Firm Contracts On The Basis Of Power

The theory of firm that is one branch of Economics of Contract, in the efforts of many followers of Ranald H. Coase, has formed a whole research framework. Coase explored the reasons why authority and direction are economically superior to market relations. The firm replaces price mechanism partly due to transaction cost. The equilibrium point of firm and market decides the scale of the former, when marginal transaction cost equals to marginal monitoring cost. Unfortunately, different scholars hold different points of view, or even conflicted with each other about the nature of firm and the relation between market and firm. A primary assumption to sign a contract is that the relationship of the two contracting parties is equal for both market and firm contract. But the distinction between the firm and the market, which is the firm feature and can be used to define a firm, is authority and hierarchical relations. This means that there is an evident conversion when firm contract is signed. Unequal relation cannot be explained if the firm and the market are both defined as governance mechanism with different forms, or it can't be explained that the nature of firm is a nexus of contract if the firm mechanism is different from market.Residual claim and residual right of control are very important concepts. Grossman and Hart found that profit of ex ante investment is in the risk of being deprived by ex post opportunist. So, the allocation of residual right of control that inspires relation-specific investment is efficient. Alchian and Demsetz have a different model in which it is residual claim that defends enterprise performance efficiently. A monitor holding residual claim would like to supervise other members of the production team for his/her own profit. Evidently, the two concepts arise on the basis of different assumption. The former is an ex ante governance mechanism; while the latter is an ex post one. But a mainstream view is that the principle of the corresponding residual claim with residual right is the core of modern firm theory, which is unconceivable.To study the nature and the border of firm, whether the firm is regarded as a nexus of...