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Contracts and Hierarchies: A Moral Examination of Economic Theories of the Firm

Published online by Cambridge University Press:  12 February 2018

Jooho Lee*
Pepperdine University


An influential set of economic theories argue that the firm is a nexus of contracts that institute a hierarchy to overcome the problems of incomplete contracting in the market. However, the economic theory of the firm as a hierarchy violates the moral requirement to respect the autonomy of those who contract into the firm. The internal logic of the theory depends on a morally unacceptable abdication of a part of the employee’s capacity to set her own ends in the future. So a different theory is needed to understand the nature and purpose of the firm. The development of such a theory can benefit from business ethicists engaging with existing economic theories of the firm to explore concepts like contracts, agency, and property.

Copyright © Society for Business Ethics 2018 

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