In summary, two necessary conditions
exist for the emergence of the firm on the
prior assumption that more than pecuniary
wealth enter utility functions: 1) It is
possible to increase productivity through
team-oriented production, a production
technique for which it is costly to directly
measure the marginal outputs of the cooperating
inputs. This makes it more
difficult to restrict shirking through simple
market exchange between cooperating inputs.
2) It is economical to estimate marginal
productivity by observing or specifying
input behavior. The simultaneous occurrence
of both these preconditions leads
to the contractual organization of inputs,
known as the classical capitalist firms with
(a) joint input production, (b) several input
owners, (c) one party who is common
to all the contracts of the joint inputs, (d)
who has rights to renegotiate any input's
contract independently of contracts with
other input owners, (e) who holds the
residual claim, and (f) who has the right
to sell his central contractual residual
status.