Do firm boundaries matter?

Sendhil Mullainathan

In his famous article, "The Nature of the Firm," Ronald Coase (1937) raised two fundamental questions that have spawned a large body of research: Do firm boundaries affect the allocation of resources? And, what determines where firm boundaries are drawn? While the first of these questions has received some theoretical attention - notably Oliver Williamson (1975, 1985), Benjamin Klein, Robert Crawford, and Armen Alchian (1978) and Sanford Grossman and Oliver Hart, (1986) - it has largely been ignored empirically. Instead, the empirical work in this area, discussed in the other articles in this session, has addressed the second question by analyzing the determinants of vertical integration. Thus, while we know something about the forces that determine firm boundaries, we know relatively little about how these boundaries affect actual firm behavior. This is a major limitation in our...