The Boundaries of the Firm
20 important questions on The Boundaries of the Firm
What is "Transaction Cost Economics"? Where is it used for?
It helps managers decide what activities to do internal and what activities to obtain from the external market.
What are Transaction Costs?
Firms VS Markets: What are the Advantages of Firms?
- Coordination of highly complex tasks (specialised division of labor)
- Transaction-specific investments (highly valuable within firm, little/no use in external market)
- Community of knowledge (employees within firms have ongoing relationships, exchange ideas and work closely together to solve problems)
- Higher grades + faster learning
- Never study anything twice
- 100% sure, 100% understanding
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Firms VS Markets: What are the Disadvantages of Firms?
- Low-powered incentives (wages, salaries are less attractive than entrepreneurial opportunities and rewards)
- The principal-agent problem
What is the Principal-agent problem?
Firms VS Markets: What are Advantages of Markets?
- Increased flexibility (able to compare prices and services along providers)
Firms VS Markets: What are Disadvantages of Markets?
- Opportunism by other parties (self-interest)
- Incomplete contracting (information asymmetries)
- Enforcement of contracts (difficult, costly, time-consuming to enforce legal contracts)
What is an Information Asymmetry?
Can lead to a lemons problem
What are Liquidity Events?
- Exit strategyEvent that allows founders and early investors in a company to cash out some or all of their ownership shares. It converts the ownership equity held by a company's founders and investors into cash.
What is a Lemons problem?
Example: good cars and bad cars (=lemons)
Only the seller knows which car is a lemon
What is Caveat Emptor?
Information asymmetries can result in crowding out of desirable goods by inferior ones.
Make-or-Buy: What are Short-term Contracts?
Ø Lasts < 1 year
Ø No transaction-specific investments
Make-or-Buy: Short-term Contracting; What is the benefit of this approach?
Make-or-Buy: Short-term Contracting; What is the drawback of this approach?
Make-or-Buy: What is Licensing?
Make-or Buy: What is Franchising?
Make-or-Buy: What is a Credible Commitment?
What are Internal Transaction Costs?
What are External Transaction Costs?
What is a Parent-Subsidiary Relationship?
The question on the page originate from the summary of the following study material:
- A unique study and practice tool
- Never study anything twice again
- Get the grades you hope for
- 100% sure, 100% understanding
