Towards a Relational Theory of the Firm

• In Event: 2451 - Section on Organizations, Occupations, and Work Refereed Roundtables (1 hour)
  In Refereed Roundtable 60min: Table 26. Organizational Theory

Abstract

I draw on a relational account of managerial agency to develop an account of the determination of firms’ boundaries. In this account two principals with conflicting objectives, representing a producer and customer, are on opposing sides of an exchange. These two principals can reconcile conflict through formal contracting or through an agent who uses ambiguity to reconcile conflict between them. I examine the role of financial accounting standards and management accounting techniques as providing alternative approaches to reconciling conflict and as conditions of possibility relating to the determination of the boundaries of the firm. When standards are rigorous, assurance is provided to the producer and customer through formal contracting and the customer is the residual claimant. When standards are permissive, the agent uses ambiguity to reconcile conflict between the two principals and increases the return earned on the assets. In this instance the producer’s shareholders are the residual claimants. I discuss the consequences of these different outcomes for the returns earned on the assets supporting the production adopted in this circumstance. I argue that firms internalize assets associated with a particular form of production when they earn a higher return on those assets than would be earned on the assets if they were transferred for alternative use in the course of outsourcing production. I draw on occupational pension fund management as a case illustrating this argument.

Author

• Yally Avrahampour, London School of Economics & Political Science