The Firm in the Knowledge Economy: A Theory of the Human-Capital Based Enterprise
Degree GrantorUniversity of Canterbury
Degree NameDoctor of Philosophy
The focus of the thesis is on the firm in the “knowledge economy”. A significant issue for the firm is the increasing importance of human capital in the knowledge economy and thus we examine the theory of the human-capital based firm. In the first section of the Introduction three questions are asked, What is a knowledge economy? How can we measure such an economy? and Can we know if we are in a new economy?, but only the last of them can be answered and only positively for the U.S. After this a brief survey of the theory of the firm literature is given. Chapter 2 argues that the current mainstream approaches to firm do not deal well with the human-capital based firm. Chapter 3 looks in more detail at the two extensions of the Grossman Hart Moore approach to modelling the human-capital based firm. The discussion centres on Brynjolfsson (1994) and Rabin (1993). An error in one of Rabin’s proofs is noted. As these papers are the mainstay of the orthodoxy approach to the human-capital based firm we discuss them in detail as a spring-board to developing a more satisfactory model of the human-capital based firm in the following chapters. Chapter 4 turns to a discussion of the more recent “reference point” approach to the firm. Chapter 5 attempts to apply the reference point approach to the human-capital based firm. Two models are developed. The first suggests that heterogeneity of references matters in determining the outcome when choosing between the use of independent contractors and employees. When preferences are homogeneous, the first best and the optimal level of co-ordination can be achieved. Here the scope of the firm is clear. In some cases the activities of the firm are undertaken in-house while in others an independent contractor is utilised. Heterogeneity of preferences results in outcomes, which include deadweight losses, being determined by both the sign and the size of the change in the benefits to the agents. Both under and over levels of co-ordination can occur. The scope of the firm is inconclusive. This suggests that the organisation of a human capital based firm depends on the “types” of human capital in the firm. Having a homogeneous group of human capital involved in a firm may well lead to a different organisational form than that found in a firm which involves a heterogeneous group of human capital. This issue is examined in the following section of the chapter. A model is developed in which the optimal organisational form is determined by two conditions: 1) a “Make-or-Buy” constraint which picks an independent contractor contract or an employment contract depending on which contractual type results in the optimal of two widgets being chosen and 2) if an employment contract is chosen then the owner of the integrated firm is whoever has the highest “aggrievement level”, and thus will “shade” the most. Some of the conclusions give conditions under which more than one of the possible organisational forms result in the efficient outcome. What the results of Chapter 5 suggest is that a human-capital only firm with heterogeneous human capital is likely to be unstable and thus a long lasting human-capital only firm will consist of homogeneous human capital. A firm which involves heterogeneous human capital will require some “glue”, in the form of non-human capital of some kind, to remain viable. Given the importance of this glue to the firm ownership of the firm by the owner of the non-human capital is likely. Chapter 6 is the conclusion.