Alchian and Demsetz on Specialization and Firms

A reader pointed me to their classic paper, which is exactly on point.

there is a source of gain from cooperative activity involving working as a team, wherein individual cooperating inputs do not yield identifiable, separate products which can be summed to measure the total output. For this cooperative productive activity, here called “team” production, measuring marginal productivity and making payments in accord therewith is more expensive by an order of magnitude than for separable production functions.

In their summary,

While ordinary contracts facilitate efficient specialization according to comparative advantage, a special class of contracts among a group of joint inputs to a team production process is commonly used for team production. Instead of multilateral contracts among all the joint inputs’ owners, a central common party to a set of bilateral contracts facilitates efficient organization of the joint inputs in team production. The terms of the contracts form the basis of the entity called the firm-especially appropriate for organizing team production processes.

3 thoughts on “Alchian and Demsetz on Specialization and Firms

    • I appreciate it. But then I’m like that character in The Hurt Locker who loves everything.

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