Developing a Theory of the Firm for the 21st Century

Among the most influential "theories of the firm" are transactions cost economies, in which firms are thought to arise because of threats of opportunism created by the transaction-specific investments needed to complete economic exchanges: agency theory, wherein firms are thought to exist in order to ensure that employee actions are consistent with the interests of a firm's owners, its shareholders; team production theory, according to which firms are thought to come into being in order to prevent shirking by those cooperating to create, produce, and sell products or services; and incomplete contract theory, further to which firms are thought to arise in order to assign residual rights of control when complete contracts among those working together cannot be written, and to mitigate associated incentive conflicts. Here, Alvarez et al examine the limitations of the economic theories of the firm, especially in the context of the 21st century.