NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Corporate Culture as a Theory of the Firm

Gary B. Gorton, Alexander K. Zentefis

NBER Working Paper No. 27353
Issued in June 2020
NBER Program(s):Corporate Finance, Industrial Organization

Markets and firms offer contrasting methods to arrange production. In markets, contracts govern the purchase of parts and services that compose production. In firms, the shared values, customs, and norms coming from a corporate culture govern employees’ joint development of those parts and services. We argue for this distinction as a theory of the firm. Firms exist because corporate culture at times is more efficient at carrying out production than detailed contracts. The firm’s boundary encircles the parts of production for which a manager optimally chooses corporate culture as the organizing device. The model can explain why some mergers and acquisitions fail, in a way consistent with empirical evidence, and why corporate cultures are hard to change.

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Document Object Identifier (DOI): 10.3386/w27353

 
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