Economic Theories of the Firm - 2

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This is an accomplishment-based renewal of the research of one of the most creative, influential and productive scholars in the modern economic theory of industrial organizations. The primary emphasis in this project will be on studying the interactions between the co-evolution of manufacturing firms, their suppliers, technologies, and organization forms and on the problems of coordination and strategy in the presence of returns to scale, complementarities, and "design dependence." A second emphasis will be on the incentives at work in firms and how compensation contracts, jobs, authority relations and decision processes are designed in light of these problems. A third emphasis will be on the evolution of modern institutions for supporting exchanges and how these affected the evolution of the modern firm. The first part of the project represents a major new direction of research that should develop into a fruitful and exciting area of economic theory. Research completed under the previous NSF grant on individual firms provides a new theory of discrete organizational design with the extent of communications with customers as the major design variable. Profit maximizing firms are shown to choose one of two different and complementary organizational structures: a low inventory, extensive communication organization or a high inventory, low communication system. The low inventory firms differ from high inventory firms in the same environment in that they have higher rates of new product introduction, more flexible production technologies (e.g., robotics), greater reliance on subcontractors, and more general training for workers. The next phase of the research will be to expand this theory to study the evolution of manufacturing systems and other activities across firms and eventually to develop a rigorous economic theory of the role of management.