Munich Personal RePEc Archive

Why do firms incorporate and what difference does it make?

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

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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”.

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