Corporate Culture as a Theory of the Firm
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.
We thank Nick Barberis, James Choi, Julia DiBenigno, Stefano Giglio, Will Goetzmann, Zhiguo He, Jon Ingersoll, Bryan Kelly, Sang Kim, Tara Levens, Gen Li, Mark Newman, Tauhid Saman, Kelly Shue, Ted Snyder, Heather Tookes, Kaushik Vasudevan, and seminar participants at Yale SOM for their valuable feedback and comments. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.