Why Do Firms Exist?

Vipin P. Veetil ()
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Vipin P. Veetil: George Mason University

A chapter in Advances in Artificial Economics, 2015, pp 15-32 from Springer

Abstract: Abstract The basic economic problem is how to allocate resources in a system where information about preferences, endowments and production possibilities is dispersed among the many (Hayek 1945; Hurwicz 1973). In some areas of economic activity resource allocation happens through the “invisible hand” of markets, while in other areas one sees the visible hands of managers. What accounts for the difference in economic organization? In a system with dispersed information, the problem of efficient allocation of resources is essentially a problem of communication. And communication involves noise. Firms take less time than markets to communicate information, but markets are more robust to noise. In so far as the degree of noise and value of speed vary across economic activities, so will the optimal form of economic organization.

Keywords: Optimal Form; Economic Agent; Vertical Integration; Social Welfare Function; Initial Endowment (search for similar items in EconPapers)
Date: 2015
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Persistent link: https://EconPapers.repec.org/RePEc:spr:lnechp:978-3-319-09578-3_2

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DOI: 10.1007/978-3-319-09578-3_2

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