Previous developments in the opportunism-independent theory of the firm are either restricted to special cases or are derived from the capabilities or resource-based perspective. However, a more general opportunism-independent approach can be developed, based on the work of Demsetz and Coase, which is nevertheless contractual in nature. This depends on 'direction', that is, deriving economic value by permitting one set of actors to direct the activities of another, and of non-human factors of production. Direction helps to explain not only firm boundaries and organisation, but also the existence of firms, without appealing to opportunism or moral hazard. The paper also considers the extent to which it is meaningful to speak of 'contractual' theories in the absence of opportunism, and whether this analysis can be extended beyond the employment contract to encompass ownership of assets by the firm. © The Author 2005. Published by Oxford University Press on behalf of the Cambridge Political Economy Society. All rights reserved.
Bibliographical noteThis is a pre-copy-editing, author-produced PDF of an article accepted for publication in Cambridge journal of economics following peer review. The definitive publisher-authenticated version Love, J. H. (2005). On the opportunism-independent theory of the firm. Cambridge journal of economics, 29(3), 381-397 is available online at: http://cje.oxfordjournals.org/content/29/3/381
- theory of the firm