Theory of the Firm

Rationales for Establishing Firms

Input/Output Efficient scale/technology

Transactions costs Contracts

Firm Objectives

• Maximize profits

• Maximize growth

• Maximize sales

• Maximize stock price

• Maximize managers’ income/career path

Firm Organization

• Vertical integration

• Organization of management

• Functional/divisional separation

• Compensation system

Forms of Firm Ownership

Sole proprietorship Partnership

Forms of Firm Ownership

Corporation

Companies whose capital is divided into shares that are owned by individuals who have limited responsibility for the debts of the company.

Corporations• Benefits

• Costs

• Objectives

• Conflicts

Separation of ownership from control

• Expected returns to stockholders > bondholders