The Firm as a Subsociety
40 Pages Posted: 18 Feb 2021
Date Written: January 13, 2021
We propose a view of firms as subsocieties that are shaped by shared perceptions of purpose and justice. Applying insights from political and legal theory, we discuss how employees are members of these mini-societies who have exchanged certain rights, such as formal authority over their work and compensation structure, for the benefits of membership in the firm. For these employees, expectations arise that are similar to those held by members of civic society at large; namely, that norms of justice and common social aims will be upheld. This view suggests a unique role for those who own and manage firms, as well as a different mechanism from standard theories of the firm for shaping firm boundary decisions. Boundary choices, in addition to their efficiency effects as described by existing theories, are also evaluated by employees for consistency with the espoused purpose and standards of justice of the firm. In general, this subsociety perspective suggests that theories of the firm should account for both societal and efficiency effects when assessing optimal governance of transactions.
Keywords: Theory of the Firm, Firm Boundaries, Corporate Purpose, Justice
JEL Classification: D2, D21, D23, L2, L22, L23, M12, M14
Suggested Citation: Suggested Citation