The Nature of the Firm

The Nature of the Firm, published in 1937 in the journal Economica, is Ronald Coase's founding essay of New Institutional Economics. Coase asked why firms exist at all if markets coordinate production efficiently on their own, and answered that a firm arises to internalize transactions whose costs, of search, negotiation, monitoring and enforcement, known collectively as transaction costs, are cheaper to bear inside a managed hierarchy than to repeat across an open market; a firm grows until the cost of organizing one more transaction internally equals the cost of carrying it out on the open market instead.