At this juncture, as an aside, we b

At this juncture, as an aside, we briefly
place this theory of the firm in the contexts
of those offered by Ronald Coase and
Frank Knight.9 Our view of the firm is not
necessarily inconsistent with Coase's; we
attempt to go further and identify refutable
implications. Coase's penetrating insight
is to make more of the fact that
markets do not operate costlessly, and he
relies on the cost of using markets to form
contracts as his basic explanation for the
existence of firms. We do not disagree with
the proposition that, ceteris paribus, the
higher is the cost of transacting across
markets the greater will be the comparative
advantage of organizing resources
within the firm; it is a difficult proposition
to disagree with or to refute. We could
with equal ease subscribe to a theory of
the firm based on the cost of managing,
for surely it is true that, ceteris paribus,
the lower is the cost of managing the
greater will be the comparative advantage
of organizing resources within the firm. To
move the theory forward, it is necessary
to know what is meant by a firm and to
explain the circumstances under which
the cost of "managing" resources is low
relative to the cost of allocating resources
through market transaction. The conception
of and rationale for the classical firm
that we propose takes a step down the
path pointed out by Coase toward that
goal. Consideration of team production,
team organization, difficulty in metering
outputs, and the problem of shirking are
important to our explanation but, so far
as we can ascertain, not in Coase's. Coase's
analysis insofar as it had heretofore been
developed would suggest open-ended contracts
but does not appear to imply anything
more-neither the residual claimant
status nor the distinction between employee
and subcontractor status (nor any
of the implications indicated below). And
it is not true that employees are generally
employed on the basis of long-term contractual
arrangements any more than on a
series of short-term or indefinite length
contracts.