The Theory of the Firm: Information, Incentives, and Organization

This Handbook of Industrial Organization provides a comprehensive overview of the theory of the firm, moving beyond traditional market analysis to explore internal firm behavior and organization. It examines the boundaries of firms, issues of capital structure, the impact of separated ownership and control, and the complexities of internal hierarchies. The authors synthesize various theoretical perspectives, including incomplete contracts, information economics, agency theory, and reputation, to explain the existence, financing, management, and internal workings of firms, highlighting the challenges arising from asymmetric information and incentive alignment. Ultimately, the chapter seeks to understand the forces shaping firm behavior and structure, acknowledging the limitations of treating the firm as a simple profit-maximizing entity.