HEC PhD. Program Research Seminar - Syllabus Economic Theories of the firm and organizations (ETFO) ***

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1 HEC PhD. Program Research Seminar - Syllabus Economic Theories of the firm and organizations (ETFO) *** Professor: Bertrand Quélin, HEC Paris School of Management (Assistant - Mrs. Lalo: quelin@hec.fr) Schedule: 10 weekly seminars - 2 hours (cf. calendar) Web site: Positioning of the seminar: In large measure, the economics of organization arose in response to perceived limitations in the neoclassical theory of the firm. This research seminar covers some economic theories of the firm and organizations related to management. It is entirely devoted to the assessment of nine economic theories that are interested in the firm like an organizational form. The firm is not a stand-alone entity but is to be examined in relation to the market and other modes of organizing economic activities. This seminar is thus intended to bring to the students basic knowledge in economics of organization, whatever their background and their major in the HEC PhD Program. It is also devoted to the recent developments of these economic theories and to the research tasks in strategic management and more generally in management. This seminar covers dimensions which one finds in the modern economic analysis of the firm like the coordination between agents, the delegation and the authority, vertical integration and the hybrid forms of organization, the contracts and competences. The theories are approached through the theoretical background, authors, concepts and tools. The seminar is about the internal coherence of each stream or theories. The examination of the theory of property rights, analysis of the growth of the firm, and the study of the institutional environment are also undertaken in order to offer consequent control of tools and analyses. This is done for understanding well the different cornerstones of a particular economic theory of the firm. This seminar is also interested in the way in which the contributions of the studied economic theories are integrated into the most recent research in management. The new theories of the economics of organization that have taken shape over the past 40 years have vastly expanded the research agenda in both economic theory and organization theory as well as in strategic management, marketing, finance, human resources, decision science, and management control. This seminar is thus opened to all the disciplines of management. Pedagogy: Teaching is organized around the critical presentation of selected theories and the thought of the authors. The preliminary reading by students of articles representative of the main topics is mandate. In average, two articles have to be read and study in advance for each session. A complementary bibliography is provided to deepen (not mandatory). Each session is organized around an internal analysis of the coherence of the theory, assumptions, hypotheses and contribution of each theory to both economics and management. Teaching is thus based on discussions and critical of works, and analysis of articles and research tasks. In complement, the seminar is devoted to the development of the economic analyzes of the firm and organizations and, with the assessment of their contribution to research in management. Bertrand Quélin HEC PhD. Program - Economic Theories of the Firm and Organizations 1

2 Organization of the seminar: Each session will follow the following format, except for the first: Student presentation: two presentations for each session, limited to 10 minutes each one, will introduce and analyze one of the two texts selected for the meeting; each talk and discussion of one article will be ensured by one student; these two presentations, in didactic matter, will be followed of a discussion and questions and answers; this general discussion of the two articles will be limited to 10 minutes. Analysis: each seminar will be then devoted to a deep analysis to understand internal coherence and the contributions of the studied theory; this analysis developed by the professor will be limited to 1 hour. New trends and further developments: the last half an hour will be devoted to the recent developments of the theory, the bonds with problems and questions of research anchored in management, with a specific focus on strategy and business policy; it will rest on an interaction and exchanges on the problems being able to mobilize such or such part of the studied economic theory. Evaluation: The evaluation will be: Student presentation: 30% Oral participation: 20% Final written work: 50% The evaluation of the student s presentation will rest on the clearness of the oral presentation and the capacity to answer the questions. It requires the preliminary handing-over of a hard copy of the notes or transparencies (to be sent by the day before). The oral participation will take account of the relevance of lightings, analysis and standpoint representing a thorough reading of the two texts subjected for the preparation of the meeting. The final written note will consist of a work of drafting of an analysis relating to an economic topic chosen by the professor in accordance with each student. This written note will have to be structured in the following way: After the discussion and the comparison of topics and analyses supported by the authors (of a third to less than half of the written note), written work will have to necessarily stress the analysis of the prospects offered by the economic literature and the development for new tracks of research in management. For this purpose, a rigorous step is necessary resulting writing proposals for a research, and in proposing an adequate framework to examine them (half to two thirds of written work). The evaluation of the written work will concern the demonstration of a good comprehension of the mobilized articles and the quality of the developed prospects for research. This written work will have to be given to more at the end of January Bertrand Quélin HEC PhD. Program - Economic Theories of the Firm and Organizations 2

3 Main Topics of the seminar: Session #1 - Introduction Short history of the economic thought Preliminary presentation of the main streams, schools and authors in economics of organization Methodological bases: methodological individualism, rationality, data processing, and coordination of the actions Why economic theories of the organization? Is an economic theory of the firm possible? Prospects on the economic theories of the firm Session 1 - Articles to be read before the session Paul MILGROM & John ROBERTS, Economic Theories of the Firm: Past, Present, and Future, The Canadian Journal of Economics, Vol. 21, N 3 (Aug., 1988), Holmström, B., Roberts, J. (1998). The boundaries of the firm revisited. Journal of Economic Perspectives, 12, 4, Session #2 Theory of Property Rights Law and economy: is the definition of the Property Rights possible? Sharing the value created in the organizations and through the contracts Team production and information costs The functions of contracting and taking risk Difficulties of metering outputs and monitoring workers Property Rights and the institutional environment Session 2 - Articles to be read and prepared Armen A. ALCHIAN & Harold DEMSETZ, Production, Information Costs, and Economic Organization, The American Economic Review, Vol. 62, N 5 (Dec., 1972), Oliver HART & John MOORE, Property Rights and the Nature of the Firm, The Journal of Political Economy, Vol. 98, N 6 (Dec., 1990), > Anderson, T.L., & Hill B.C. (1990), The race for property rights, Journal of Law & Economics, 33. > Field, B.C. (1989), The evolution of property rights, Kyklos, 42(3), pp > Barzel, Y. (1997), Economic analysis of property rights, Cambridge U.P., 2 nde edition. Session #3 - Agency Theories: delegation and monitoring Managerial behavior and Agency costs Going inside the black box Normative approach and positive approach Training of the teams and the division of the income: fixed payment and residual claims Bertrand Quélin HEC PhD. Program - Economic Theories of the Firm and Organizations 3

4 The question of the monitoring and the evaluation of the efforts Costs of monitoring and motivating agents Compromise design of the firm and the risk Renewal of the Agency Theory Session 3 - Articles to be read and prepared Michael J. JENSEN & William H. MECKLING, Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure, Journal of Financial Economics, Vol. 3, N 4 (Oct., 1976), Eugene F. FAMA & Michael C. JENSEN, Agency Problems and Residual Claims, Journal of Law & Economics, Vol. XXVI, (June 1983), > Fama, E.F. (1980), Agency problems and the theory of the firm, Journal of Political Economy, 88(2), p > Fama, E.F., & M.C. Jensen (1983), Agency problems and residual claims, Journal of Law and Economics, 26, pp > Eisenhardt, K.M. (1989), Agency theory: an assessment, Academy of Management Review, 14(1), pp Session #4 - Theory of the incentives and the incomplete contracts A contract-based theory of the firm Effectiveness of contracts and markets: mechanisms and devices Mechanisms of incentive Contracts and clauses of self-enforcement Can the economic organization be understood through the drafting of a contract between its members? Contracts or courts of justice? Session 4 - Articles to be read and prepared Benjamin KLEIN & Keith B. LEFFLER, The Role of Market Forces in Assuring Contractual Performance, The Journal of Political Economy, Vol. 89, N 4 (Aug., 1981), Sanford J. GROSSMAN & Oliver D. HART, The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration, The Journal of Political Economy, Vol. 94, N 4 (Aug., 1986), > Oliver Hart, John Moore, "Property Rights and the Nature of the Firm", The Journal of Political Economy, Vol. 98, No. 6. (Dec., 1990), pp > David M. Kreps, "In Honor of Sandy Grossman, Winner of the John Bates Clark Medal", The Journal of Economic Perspectives, Vol. 2, No. 2. (Spring, 1988), pp > Patrick Bolton, David S. Scharfstein, "Corporate Finance, the Theory of the Firm, and Organizations", The Journal of Economic Perspectives, Vol. 12, No. 4. (Autumn, 1998), pp Bertrand Quélin HEC PhD. Program - Economic Theories of the Firm and Organizations 4

5 > Benjamin Klein, "The Role of Incomplete Contracts in Self-Enforcing Relationships", Revue d'economie Industrielle, vol. 92 (2è et 3è trim. 2000). Session #5 - Frontiers of the firm and Transaction Cost Economics: the approaches of R. Coase and O.E. Williamson Explaining the existence and scope of the firm Firm as a consequence of the costs of market transactions Market and organization: the Market/Hierarchy dichotomy Determining the governance: ownership and direction Attributes of the transactions Vertical integration and hybrid organizational forms Holdup and opportunism of the agents Organizational arrangements and institutional environment Is the Transaction Cost Economics useful for management? Session 5 - Articles to be read and prepared Ronald H. COASE, The Nature of the Firm, Economica, New Series, Vol. 4, Issue 16 (Nov., 1937), Oliver E. WILLIAMSON, Transaction Cost Economics in R. Schmalensee and R. D. Willig (eds.), Handbook of Industrial Organization, Elsevier Sciences Publishers, Vol. 1 Chap. 3, (1989), > COASE R. [1937], Leçon inaugurale. 6ème Ecole d'eté Méditerranéenne d'economie Industrielle, Institut d'etudes Scientifiques de Cargèse. In de Bandt J., Ravix J.-L., Romani P.-M. et Torre A., Ronald H. Coase, Prix Nobel 1991 de Sciences Economiques, ou de l'autre côté du "tableau noir". Revue d'economie Industrielle, 58, p > COASE R. [1972], Industrial Organization: A proposal for Research. In Fuchs V.R., Ed., Policy Issues and Research Opportunities in Industrial Organization. NBER, New York. > Simon, H. (1991), Organizations and markets, Journal of Economic Perspectives, 5(2), pp Session #6 - Organizational forms and Bureaucratic costs: questions of coordination and efficiency Forms of organization Authority in the firm Incentives and coordination Bureaucratic costs Limits of the efficiency of the organizations Session 6 - Articles to be read and prepared Oliver E. WILLIAMSON, The Modern Corporation: Origins, Evolution, Attributes, Journal of Economic Literature, Vol. 19, N 4 (Dec., 1981), Bertrand Quélin HEC PhD. Program - Economic Theories of the Firm and Organizations 5

6 Oliver E. WILLIAMSON, Comparative Economic Organization: The Analysis of Discrete Structural Alternatives, Administrative Science Quarterly, Vol. 36, N 2 (June 1991), > Dow G.K., "The function of authority in transaction costs economics", Journal of Economic Behavior and Organization, 1987, 8, p > Williamson, O.E. (1991), "Strategizing, economizing, and economic organization", Strategic Management Journal, 12, pp > Williamson, O.E., "Transaction cost economics: the governance of contractual relations", Journal of Law and Economics, 2. > Klein, P.G. & H.A. Shelanski (1995), Empirical research in transaction cost economics: A review and assessment, Journal of Law, Economics and Organization, 11(2), pp > Aghion, Ph. & Tirole, J. (1997), «Formal and Real Authority in Organizations», Journal of Political Economy, vol.105, n 1, p Session #7 - Game theory and contractual approach of the firm: the contribution of M. Aoki The interpenetration of firm and market Internal coordination and co-operation of groups of actors Incentive mechanisms and creation of value The sharing of the surplus created between shareholders and employees Social incentives and groups Session 7 - Articles to be read and prepared Masahiko AOKI, Horizontal vs. Vertical Information Structure of the Firm, The American Economic Review, Vol. 76, N 5 (Dec., 1986), Masahiko AOKI, Toward an Economic Model of the Japanese Firm, Journal of Economic Literature, Vol. 28, N 1 (March 1990), > AOKI Masahiko (1984), The Co-operative Game Theory of the Firm, New York, Oxford University Press. > AOKI Masahiko, GUSTAFSSON Bo & WILLIAMSON Oliver E. (1990), The Firm as a Nexus of Treaties, SAGE Publications. Session #8 - Private Costs, Social Costs and Transaction Costs: The Coase Theorem Market and firm: their respective functions Private costs, social costs: the theorem of Coase Property Rights as basis of the exchange Genesis of the regulation and creation of new markets Session 8 - Articles to be read and prepared Ronald H. COASE, The Problem of Social Cost, Reprinted from The Journal of Law and Economics, 3 (October 1960), 1-44 by the University of Chicago Press. Bertrand Quélin HEC PhD. Program - Economic Theories of the Firm and Organizations 6

7 > Granovetter, M. (1999), Coase encounters and formal models: Taking Gibbons seriously, Administrative Science Quarterly, 44: > Madhok, A. (2002), Reassessing the fundamentals and beyond: Ronald Coase, the transaction cost and Resource-based theories of the firm and the institutional structure of production, Strategic Management Journal, 23: Session #9 New institutional Economics Institutional environment and private contracts The transactional sector and the "visible hand" The incompleteness of contracts and their opposable character with the common right Transactions and economic development: privatizations, regulations Economic growth and institutions Session 9 - Articles to be read and prepared Douglass C. NORTH, Institutions, The Journal of Economic Perspectives, Vol. 5, N 1 (Winter, 1991), Douglass C. NORTH, Informal Constraints, Institutions, Institutional Change and Economic Performance, (1990), Cambridge University Press, > North D. (1981), Structure and Performance: The Task of Economic History. Journal of Economic Literature, 16, p > North, D.C Institutions, institutional change and economic performance. Cambridge, MA: Cambridge University Press. > North, D.C., & Weingast, B.R Constitutions and commitment: The evolution of institutions governing public choice in seventeenth-century England. Journal of Economic History. 44(4): > Levy, P., & Spiller, P.T Regulations, Institutions, and Commitment. Cambridge, MA: Cambridge University Press. Session #10 - The theory of growth of the firm and its contributions to the Resource-based view: the contribution of E. Penrose Contributions of E Penrose to strategic management Bonds between Penrose and the Resource-based View A basic resource-based conceptualization of the firm Respective roles of the leader and the environment in the growth of the firm A dynamic approach of the development of the firm Session 9 - Articles to be read and prepared Wernerfelt, B. (1984). A Resource-Based View of the Firm. Strategic Management Journal, 5(2): Penrose, E. (1955), «Limits to the Growth and Size of Firms», American Economic Review, 45(2): Bertrand Quélin HEC PhD. Program - Economic Theories of the Firm and Organizations 7

8 > Barney, J. (1991), Firm Resources and Sustained Competitive Advantage, Journal of Management, 17, 1, p > Dierickx, I. & Cool, K. (1989), Asset Stock Accumulation and Sustainability of Competitive Advantage, Management Science, 35, 12, p > Kogut, B. & Zander, U. (1996), What do firms do? Coordination, identity and learning, Organization Science, 7, p > Penrose, E. (1959), The Theory of the Growth of the Firm, Basil Blackwell, Oxford. > Peteraf, M.A. (1993), The Cornerstones of Competitive Advantage: A Resource-Based View, Strategic Management Journal, 14, p Recommended Complementary Readings: In English Buckley, P.J. & Michie, J. (1996), Firms, Organizations and Contracts: A Reader in Industrial Organization (Oxford Management Readers) Oxford University Press. Milgrom, P. & Roberts J. (1992), Economics, Organization and Management - Prentice Hall Business Publishing. Trad. Fr.: Economie, Organisation et Management PUG/De Boeck (1997). In French Coriat, B. & Weinstein, O. (1995), Les nouvelles théories de l'entreprise Paris Livre de Poche. Koenig, G. (1999), De nouvelles théories pour gérer l'entreprise du XXIème siècle Paris Economica. Quélin, B. (2002), Les frontières de la firme Paris Economica. Bertrand Quélin HEC PhD. Program - Economic Theories of the Firm and Organizations 8