In the previous chapter we discussed a number of currents in the modern theory of the firm, explaining why they struggle to come to terms with the entrepreneurship phenomenon. In this and the next chapter we rely more constructively on select insights from these theories to piece together a theory of the entrepreneurial firm. We organize our discussion around the three classic themes in the theory of the firm: existence (or emergence), boundaries, and internal organization. The present chapter deals with existence and boundaries.

Coase (1937) explained the firm as a means for economizing on transaction costs, a theme elaborated by Williamson (1975, 1985, 1996). Alchian and Demsetz (1972) viewed the firm as an (albeit imperfect) solution to the free-rider problem in team production (see also Holmström, 1982), and agency theorists have subsequently provided important contributions to the understanding of contracts within the firm (e.g., Holmström and Milgrom, 1991; Roberts, 2004). The “new” property-rights approach of Oliver Hart and his colleagues and students adopted the emphasis on specific assets and investments of Klein et al. (1978) and Williamson (1985) and gave it a new twist by showing how incentives to invest in relationship-specific assets vary with ownership arrangements (Grossman and Hart, 1986; Hart and Moore, 1990). Resource-based theories emphasize the need to generate and internalize tacit knowledge, and while they are mainly theories of firm performance (financial-market returns, innovation, etc.), they do have implications for economic organization (Kogut and Zander, 1992; Langlois and Robertson, 1995; Conner and Prahalad, 1996).