• DOI:10.1080/00213624.2000.11506295
• Corpus ID: 157051424

Economic Power and the Firm in New Institutional Economics: Two Conflicting Problems

@article{Palermo2000EconomicPA,
  title={Economic Power and the Firm in New Institutional Economics: Two Conflicting Problems},
  author={Giulio Palermo},
  journal={Journal of Economic Issues},
  year={2000},
  volume={34},
  pages={573 - 601}
}

• G. Palermo
• Published 1 September 2000
• Economics
• Journal of Economic Issues

The problem of the nature of the firm is at the origin of the research program of New Institutional Economics (NIE). The problem was first addressed by R. H. Coase [1937], who explored the reasons why authority and direction are economically superior to market relations. In my interpretation of NIE, starting with the contribution of Coase, research has developed along two distinct lines. In the former, Coase' s intuition has been developed by denying the existence of real authority relations within the firm. The work of A. A. Alchian and H. Demsetz [1972] and the developments of M. C. Jensen and W. H. Meckling [1976] and S. N. S. Cheung [1983] are the main contributions to this research line. In the second approach, costs and benefits of hierarchies have been analyzed systematically by specifying the theoretical categories that make hierarchical relations economically superior to markets. O. E. Williamson [1975, 1985] is the main contribution to this line. The different views of the roles of authority in the institutions of capitalism lead to different theories of institutions. Two particular aspects of these theories are discussed in this paper: (1) the possibility of providing a straightforward characterization of the firm and (2) the internal coherence of the theories with respect to the problem of economic power. The approach of Alchian and Demsetz, if developed to its extreme consequences, leads to the conclusion that it is impossible to characterize the firm as an institution qualitatively distinct from the market; in Williamson's framework, on the contrary, the analysis of the different kinds of contractual relations that take place