Article of the Week

Every economics blogger has a "Quote of the Day/Week/whatever." I do my slightly-off impression with my series "Well Put My Friend." (I know its pretentious to assume any of the economic giants I quote are my friends, but it's an expression from my youth that I like.)

Now I'm introducing a different idea, an article of the week. Every Monday, I will post an interesting/important/silly/fun economic article that I think people will enjoy. The articles will usually be shorter and accessible to laypeople. I'll give my little pitch, but I urge others to at least glance through the article. Sometimes you need to read the original.

This week's article-

Production, Information Costs, and Economic Organization by Armen Alchian and Harold Demsetz (1972)

In this classic AER article, Alchian and Demsetz elaborate and point out some problems with Coase's theory of the firm. For Coase, the firm is an attempted to limit transaction costs. Sometimes it is tough to trade on markets and a collectivized command-based system is better.

Alchian and Demsetz agree to a certain extent, but believe the theory is incomplete. For the authors, the reason for a firm is more obvious. Two people, working together, can sometimes do things that two people could never do separately. This seems obvious, but all great economic ideas do, after someone else elaborates them.

However, in team work, there is an incentive to "shirk." If my rewards do not just depend on what I do but what my partner is doing, I'm going to try to slack and free-ride off of him. The firm is one, partial, solution to this problem.

Check out the article for more details!