EB Alchian en damsetz

Team production

Production process where multiple inputs jointly produce output that cannot be separated into individual contributions

Metering problem

Difficulty of measuring individual marginal productivity when output is jointly produced

Non-separable output

Output that cannot be decomposed into the sum of individual workers’ outputs

Shirking

Reduction of effort by team members when individual effort is hard to observe and punish

Information costs

Costs of observing

Classical firm

A contractual arrangement designed to reduce shirking in team production by lowering information and monitoring costs

Authority illusion

The idea that firms do not possess real coercive power beyond what market contracts allow

Residual claimant

The party who receives the remaining income after all other inputs are paid

Residual claim

The right to profits or losses after contractual payments to other inputs

Monitor

A specialized agent who observes input behavior

Monitoring

Activities aimed at observing input behavior to infer marginal productivity

Incentive alignment

Situation where rewards are structured so that individual incentives match collective productivity

Central contracting party

The single agent who is party to all input contracts within the firm

Contractual view of the firm

Perspective that firms are networks of voluntary contracts rather than hierarchies of authority

Market exchange

Coordination of production through prices and contracts across independent agents

Why markets fail for team production

Markets cannot cheaply identify individual productivity in non-separable production

Free-rider problem

Situation where individuals benefit from others’ effort while reducing their own contribution

Specialized monitoring

Assignment of monitoring tasks to a single agent to reduce overall monitoring costs

Firm boundary

The point at which coordination shifts from market contracts to internal organization due to information costs

Renegotiation of contracts

Ability of the monitor to revise individual input contracts without renegotiating all contracts

Firing as contract termination

Dismissal interpreted as ending a voluntary contract rather than exercising authority

Comparative advantage of firms

Firms outperform markets when monitoring costs are lower inside the organization

Profit-sharing firm

Organization where multiple team members share residual income rather than one central claimant

Problem with profit sharing

Diluted incentives to monitor and increased shirking as team size grows

Partnership

Small team organization relying on mutual monitoring rather than hierarchical control

Corporation

Firm form using share ownership

Shareholder monitoring

Control of managers through voting rights

Limited liability

Protection of shareholders from losses beyond their investment

Nonprofit organization

Firm form where residual claims cannot be capitalized

Mutual firm

Organization owned by users or employees where residual claims are shared and monitoring is weaker

Employee union

Organization that monitors employer performance on hard-to-observe compensation and benefits

Team spirit

Norms and loyalty that reduce shirking by internalizing group costs

Moral code as efficiency device

Social norms that mimic costless monitoring by discouraging shirking

Ownership of assets

Tendency for firms to own assets when monitoring their use is cheaper than renting

Absentee ownership problem

Increased misuse of assets when owners cannot cheaply observe how they are used

Firm as private market

View of the firm as a privately owned mechanism for allocating and pricing inputs

Information advantage of firms

Firms accumulate superior knowledge about input productivity through monitoring

Intra-firm competition

Competition among inputs within a firm based on observed performance

Alchian and Demsetz main thesis

Firms exist to minimize shirking in team production by assigning residual claims to monitors

Key causal chain

Team production leads to costly metering which leads to shirking which leads to firms