“It is traditional in the theory of the firm to define the production opportunity set available to the firm in terms of its boundary -- the maximum attainable set of output quantities for various input quantities, given the state of technology and knowledge. This boundary is the production function of the firm. One of our purposes here is to point out the dependence of such production functions on the structure of property rights and contracting rights within which the firm exists. We redefine the production function in order to recognize the dependence of output on the structure of property and contracting rights. That expanded framework is then used to discuss a concrete set of problems surrounding the role of labor in the firm ranging from the 'labor-managed firm' system (in which tradable capital value residual claims [common stock] are legally prohibited), and the codetermination and industrial democracy movements (in which management participation by labor is required by law), to cooperatives and professional partnerships (i. e., quasi-labor-managed firms which arise out of the voluntary contracting process), and the capitalist corporation.”

— Michael Jensen

Michael C. Jensen and William H. Meckling. "Rights and production functions: An application to labor-managed firms and codetermination." Journal of business (1979): 469-506.

Adopted from Wikiquote. Last update June 3, 2021. History

Help us to complete the source, original and additional information

Do you have more details about the quote "It is traditional in the theory of the firm to define the production opportunity set available to the firm in terms of …" by Michael Jensen?

Michael Jensen photo

Michael Jensen8

American economist 1939

Related quotes

“Why… are there any market transactions at all? Why not all production carried on by one big firm?… First, as a firm gets larger, there may be decreasing returns to the entrepreneur function, that is, the costs of organizing additional transactions within the firm may rise… Second, it may be that as the transactions which are organized increase, the entrepreneur fails to place the factors of production in the uses where their value is greatest, that is, fails to make the best use of the factors of production… Finally, the supply price of one or more of the factors of production may rise, because the "other advantages" of a small firm are greater than those of a large firm.”

Ronald H. Coase (1910–2013) British economist and author

Source: 1930s-1950s, "The Nature of the Firm" (1937), p. 394-5

“A firm may be defined as an institution which buys things, transforms them in some way, and then sells them with the purpose of making a profit. The things a firm buys we shall call "inputs." The things it sells we shall call "outputs." The process whereby the things it buys are transformed into the things it sells we shall call the "process of production." In any process of buying to sell again a process of production is always involved…
A business, therefore, is a process whereby certain inputs, valued in dollars in some way, are transformed into outputs, also valued in dollars in some way.”

Kenneth E. Boulding (1910–1993) British-American economist

Source: 1940s, Economic Analysis, 1941, p. 377

“A breakdown of management into its basic functions — development, production and marketing — revealed that the character of the functions, their chronological sequence, the closeness with which they had to be integrated and their relative importance to the success and survival of the business, all depended upon the system of techniques in the firm concerned.”

Joan Woodward (1916–1971) British sociologist

Source: Management and technology, Problems of Progress Industry, 1958, p. 21-22

“[The theory of the firm] is exactly analogous to the analysis of the reactions of a consumer by means of indifferent curves. Indeed, a consumer is merely a ‘firm’ whose product is ‘utility’.”

Kenneth E. Boulding (1910–1993) British-American economist

Source: 1940s, The theory of the firm in the last ten Years, 1942, p. 799

“Internal inducements to expansion arise largely from the existence of a pool of unused productive services, resources and special knowledge, all of which will always be found within any firm.”

Edith Penrose (1914–1996) economist

Source: The Theory of the Growth of the Firm, 1959, p. 66

“The circular-flow diagram offers a simple way of organizing the economic transactions that occur between households and firms in the economy. The two loops of the circular-flow diagram are distinct but related. The inner loop represents the flows of inputs and outputs. The households sell the use of their labor, land, and capital to the firms in the markets for the factors of production. The firms then use these factors to produce goods and services, which in turn are sold to households in the markets for goods…”

N. Gregory Mankiw (1958) American economist

N. Gregory Mankiw, Brief Principles of Macroeconomics. 2011, p. 24-25
2000s -

“Outside the firm, price movements direct production, which is co-ordinated through a series of exchange transactions on the market. Within a firm, these market transactions are eliminated and in place of the complicated market structure with exchange transactions is substituted the entrepreneur-coordinator, who directs production. It is clear that these are alternative methods of coordinating production. Yet, having regard to the fact that, if production is regulated by price movements, production could be carried on without any organization at all might we ask, why is there any organization?”

Ronald H. Coase (1910–2013) British economist and author

Source: 1930s-1950s, "The Nature of the Firm" (1937), p. 388

“A leading firm that controlled a large portion of the output of a given organizational field operated as a price setter. To set prices, the actors in that firm had to control their suppliers and marketing in order to increase their own efficiency and have the potential to cut off other firms from supplies or customers.”

Neil Fligstein (1951) American sociologist

Source: The transformation of corporate control, 1993, p. 89

“The mark of a capitalistic society is that resources are owned and allocated by such nongovernmental organizations as firms, households, and markets. Resource owners increase productivity through cooperative specialization and this leads to the demand for economic organizations which facilitate cooperation. When a lumber mill employs a cabinetmaker, cooperation between specialists is achieved within a firm, and when a cabinetmaker purchases wood from a lumberman, the cooperation takes place across markets (or between firms). Two important problems face a theory of economic organization—to explain the conditions that determine whether the gains from specialization and cooperative production can better be obtained within an organization like the firm, or across markets, and to explain the structure of the organization.”

Harold Demsetz (1930–2019) American economist

Source: Production, information costs, and economic organization. 1972, p. 777, Lead paragraph

“The mark of a capitalistic society is that resources are owned and allocated by such nongovernmental organizations as firms, households, and markets. Resource owners increase productivity through cooperative specialization and this leads to the demand for economic organizations which facilitate cooperation. When a lumber mill employs a cabinetmaker, cooperation between specialists is achieved within a firm, and when a cabinetmaker purchases wood from a lumberman, the cooperation takes place across markets (or between firms). Two important problems face a theory of economic organization—to explain the conditions that determine whether the gains from specialization and cooperative production can better be obtained within an organization like the firm, or across markets, and to explain the structure of the organization.”

Armen Alchian (1914–2013) American economist

Source: Production, information costs, and economic organization. 1972, p. 777, Lead paragraph

Related topics