Cheung_The-Contractual-Nature-of-The-Firm

TheContractualNatureoftheFirmStevenN.S.CheungJournalofLawandEconomics,Vol.26,No.1.(Apr.,1983),pp.1-21.StableURL:=0022-2186%28198304%2926%3A1%3C1%3ATCNOTF%3E2.0.CO%3B2-CJournalofLawandEconomicsiscurrentlypublishedbyTheUniversityofChicagoPress.YouruseoftheJSTORarchiveindicatesyouracceptanceofJSTOR'sTermsandConditionsofUse,availableat://@jstor.org.:502007THECONTRACTUALNATUREOFTHEFIRM*STEVENN.S.CHEUNGUniversityofHongKongAmosrhalfacenturyhaselapsedsinceR.H.CoasewroteTheNa-tureofthe~irm.'Theimpactofthispaperisnowincreasing.'Atabouttwentyyearsofageandbeforereceivingabachelor'sdegreefromtheLondonSchoolofEconomics,CoaseconceivedthethesisofthatworkduringatravelingscholarshiptotheUnitedStatesin1931-32.'Consider-*FortheirhelpfulcommentsIamgratefultoArmenA.Alchian,YoramBarzel,KeithLeffler,JohnS.McGee,andDeanWorcester.'RonaldH.Coase,TheNatureoftheFirm,4Economics386(1937).Thepaper,how-ever,waswrittenseveralyearsearlier(seenote3infra).TheSocialSciencesCitationIndexprovidesthefollowinginformation.Breakingdowntheperiodof1966-80intothreefive-yearperiods,thetotalcitationsofCoase'sfirmpaperforeachsubperiodare:1966-70,17citations:1971-75,47citations;and1976-80,105citations.InpersonalcorrespondenceCoasewrotemehisrecollectionsasfollows:Aboutthefirm.Ispenttheyear1931-1932intheUnitedStateswhereIstudiedtheproblemofverticalandlateralintegrationinAmericanindustry.Fromponderingontheseproblemscamemyviewsonthenatureofthefirm.ThebasicideainthearticleontheNatureoftheFirmwascertainlyworkedoutbyOctober,1932asaletterwhichIthenwrote(andwhichhasbeenpreserved)shows.AlsoIcompletedadraftofthearticlebytheSpringof1934whilestillinDundee.AstowhyIwaiteduntil1937topublish,thereasonsarevarious.Ididnotfeelunderanygreatpressuretopublishit.Ididinfactpublishsomeotherpiecesbeforethefirmarticlebuttheideasinthesepaperswereinfactdevelopedafterthoseonthefirm.RememberthatIwasayounglecturerhavingtolearnalotinordertoteachcoursesonsubjectsonwhichIknewverylittleandthistookupagooddealoftime.AndIwasinterestedinmanyotheraspectsofeconomics.Ihaveneverbeenonetorushintoprint-indeedIfinditdifficulttoexpressexactlywhatIhaveinmindandhaveneverthoughtthattheworldwouldsuffermuchifitdidn'thavetheopportunitytoreadmyviews.Ididinfactmakesomechangesintheperiodbetween1934and1937buttherewasnochangeinmymainposition.ButIdidnotfeelanyneedtopublishbeforeIhadexpressedmythoughtsaswellasIcould.SomeoftheprojectsonwhichIworkedinthe1930shavestillnotbeencompletedalthoughIhopeonedaytodoso.Aboutdates.AsIcompletedthefirstyearofUniversityworkwhilestillathighschool(notunusualatthattime),IcompletedmyUniversityworkandpassedthedegreeexami-nationsin1931(after2yearsatLSE).IwasawardedatravellingscholarshipbytheUniversityofLondonin1931andspentthenextyearintheUnitedStates.Atthattime,3yearsresidencewasrequiredfortheawardofadegreebuttheregulationswerelooselyinterpretedsoastoallowmyyearintheUnitedStatestobecountedasayearofresidence[JolrrnalofLaw&Econotnics,vol.XXVI(April1983)l01983byTheUniversityofChicago.Allrightsreserved.0022-218618312601-0007S01.502THEJOURNALOFLAWANDECONOMICSingtheworkstartedoutastheequivalentofanundergraduatetermpaperonestandsinaweoftheinsightsthatpromptedit.TheissuessurroundingwhathasbeencalledthefirmandthescopeofeconomicbehaviorencompassedbyCoase'sthesisarefarfromre-solved.Atpresent,differentversionsaboundofwhatCoasemeant,alongwithvariedcritici~ms.~IdonotproposetoevaluatethisgrowingbodyofliteratureortoarguethatmyinterpretationisnecessarilyanaccuratepresentationofCoase'sposition.Rather,onceinspiredbyCoase'searlyworktodoresearchoncontracts,Iwishtoreturnandexpoundonthatworkinlightofmyownfindings.AnyonewhoinvestigatestheeconomicsofcontractualarrangementswillrecognizethatCoase'sfirmpaperrelatestothechoiceofcon-tract~.~YetCoase,awareofthesignificanceandrelevanceofthemea-surementproblem,suggestedin1969thatIlookintothevariousmeasure-mentsadoptedinthetimberindustry.However,thedifficultyofobtainingdatablockedthatattempt.By1974Ihadreachedtheviewthatpiece-ratecontractsofferausefulgatewaytoanunderstandingofthefirmasanorganization,becausepaymentbythepiecefallssquarelyinbetweentheatLSE.ThisexplainswhyIwasawardedmydegreein1932althoughIhadpassedtheexaminationin1931.WhenIworkedoutmyviewsonthenatureofthefirm,Iwas20or21.AletterwritteninOctober1932(andtheindependentrecollecti