Coase’s theory of the firm (theory of the firm)

Ronald Coase, a British economist, tried to explain why companies exist in “The nature of the firm”, a paper published in 1937. His answer was that markets can be expensive and fiddly to use, especially for non-standard goods. Rather than arrange contracts for each and every transaction, entrepreneurs set up firms and employ workers to do a range of tasks. This allows them to shift employees from one area to another as they see fit. The paper, along with his work on externalities and property rights, helped to win Coase the Nobel prize for economics in 1991. For more detail, read our Schools Brief.