Why do firms incorporate and what difference does it make?

holmes, james (2019): Why do firms incorporate and what difference does it make?

Abstract

Economic history suggests that technological innovations with long productivity delays contributed to the emergence of corporations. We develop a theory, with supporting evidence, explaining why in a competitive economy proprietors chose to incorporate, because of the difference in the contracts each can make. Corporations, because their equity is transferable, are not restricted to pay factors their marginal product, and therefore can use advanced technologies with long lags more efficiently, and distribute the resulting output as income optimally. Hence, corporations cause economic growth, eliminate competitive market failures, reduce income inequality, and can be viewed as “social organizations” similar to non-coercive “mini-Governments”.

• Item Type: MPRA Paper
• Language: English
• Keywords: firm type, contracting, production delays
• Subjects: D - Microeconomics > D2 - Production and Organizations; L - Industrial Organization > L2 - Firm Objectives, Organization, and Behavior; O - Economic Development, Innovation, Technological Change, and Growth > O3 - Innovation ; Research and Development ; Technological Change ; Intellectual Property Rights; O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity

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