Why Corporations Exist

Paper Summary:

This paper draws the analogy that corporations are like automobiles, in that both exist to move people and goods and both fuel the economy. The writer maintains that corporations create automobiles to fuel the economy, but they also create other "tools" to reach the same goal, such as professionals and financial products. The writer further explains that, like the automobile, the organization is built from different parts: top, middle and low management. The writer points out that automobiles are built from parts as well: engine, wheels, carburetor and each part has its function. The writer concludes that corporations exist because they deliver better results by being more efficient in moving the people and the goods involved in the value creating process. They are also the most suitable ownership type given the diversity of investing options nowadays.
This paper includes color charts and graphs.

Outline:
Corporations and Organizations
Automobiles
Why do Corporations and Organizations Exist?

From the Paper:

"The governance mechanism as described by Williamson is based on transaction costs. Basically, these ones dictate whether transactions are made through markets or by internalizing activities. Market-based transactions are subject to uncertainty, which generate transaction costs, whereas hierarchies generate higher costs associating with controlling a wider range of activities. The central piece of his theory is the asset specificity. The higher the specificity of a company's assets is, the more agents are likely to behave opportunistically, which is an incentive for the company to internalize activities along the value chain to protect its assets.
"The traditional contract theory of the firm has recently been enriched with a more recent type of contacts: relational contract. This latest contribution suggests that each party behave in such a manner to reach the other party's expectations and the behavior is maintained by fear of retaliation of the other party(ies)."

Sample of Sources Used:

• Alchian, A. A. and Demsetz, H. 1972, 'Production, Information Costs, and Economic Organization', American Economic Review, vol.62: pp. 772-795.
• Baker, G., Gibbons, R. and Murphy, K. J. 1997, Implicit Contracts and the Theory of the Firm, Working Paper.
• Berle, A.A., Jr and Means, G. C. 1932, The Modern Corporation and Private Property, New York, Macmillan.
• Bureau of Transportation Statistics, 2007, http://www.transtats.bts.gov/
• Casson, M. 1997, Information and Organization, Oxford, Oxford University Press.

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