lecture3b - Lecture 3b Basic economic question What is the...

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1 Lecture 3b Basic economic question: What is the most economically efficient form of organization? It is the type of organization type that maximizes firms’ profit. This includes minimizing the costs of setting up and managing the organization, hiring capital and labor, producing the goods/services, and maximizing the firm’s revenues. Also the costs of complying with government regulations (including tax, occupational safety, and securities regulation). Hansmann divides everything into two categories: Costs of Market Contracting: Ex post market power/”lock-in”: If parties need to make relationship-specific investments, then the other side can take advantage of the lock-in: once the investment is made, the other side charges a high price. Merging buyer and seller can mitigate this. Asymmetric information: buyer can’t determine quality of the product except by using it.
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