The Formation Of The Nature Of The Enterprise And Corporate Authority Relations

This paper analyzes the nature of firm and the formation of authority relationship withinorganizations. The paper argues that technique of production should be taken into considerationwhile we referring to the problem of the origin of firms in market economy, since traditionaltransaction cost theory could not guarantee that a cost-saving coordinating method correspondingto one single technique is always optimal, provided that there exists a series of availabletechniques. The firm is in its nature a combination of both efficiency of producing and organizing,and it is adopted mainly on purpose of pursuing the application of more efficient producingtechniques. On analyzing the formation of authority relationship within organizations, this paper isbased on the theory of Zhao Nong (2004). This paper demonstrates that the trade of authoritycould only be feasible if and only if the authority sellers' cost of implementing the contract istotally compensated. Why it is usually that capital hires labor derives from the fact that laborcannot provide credible commitment of compensating capital's cost of implementing the contract.At the end of the paper, the domination of the optimal contract with concentrated authority withregard to that of non-concentrated authority is proved, under the assumption of risk natural. Thisverifies why concentrated authority is generally necessary and provides theoretical base toanalysis above.