Original and Derived Judgment An Entrepreneurial Theory of Economic Organization

Kirsten Foss, Nicolai Foss () and Peter Klein

No 06-09, DRUID Working Papers from DRUID, Copenhagen Business School, Department of Industrial Economics and Strategy/Aalborg University, Department of Business Studies

Abstract: Recent work links entrepreneurship to the economic theory of firm using the Knightian concept of entrepreneurship as judgment. When judgment is complementary to other assets, and these assets or their services are traded in well-functioning markets, it makes sense for entrepreneurs to hire labor and own assets. The entrepreneur’s role, then, is to arrange or organize the human and capital assets under his control. We extend this Knightian concept of the firm by developing a theory of delegation under Knightian uncertainty. What we call original judgment belongs exclusively to owners, but owners may delegate a wide range of decision rights to subordinates, who exercise derived judgment. We call these employees “proxy-entrepreneurs,” and ask how the firm’s organizational structure — its formal and informal systems of rewards and punishments, rules for settling disputes and renegotiating agreements, means of evaluating performance, and so on — can be designed to encourage forms of proxy-entrepreneurship that increase firm value while discouraging actions that destroy value. Building on key ideas from the entrepreneurship literature, Austrian economics, and the economic theory of the firm we develop a framework for analyzing the tradeoff between productive and destructive proxy-entrepreneurship. We link this analysis to the employment relation and ownership structure, providing new insights into these and related issues in the economic theory of the firm.

Keywords: Judgment; entrepreneur; delegation; employment relation; ownership (search for similar items in EconPapers)
JEL-codes: B53 D23 L2 (search for similar items in EconPapers)
Date: 2006
New Economics Papers: this item is included in nep-bec, nep-cbe, nep-cse, nep-ent, nep-hpe and nep-tid
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

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