The Impact of Ronald Coase’s “Nature of the Firm” on my Research Agenda on Overseas Chinese Merchants in Southeast Asia

Ronald Coase (1937), in his article “Nature of the Firm,” argued that if the price mechanism is used, a factor of production (owner of the firm) would need to negotiate a series of contracts separately with each of the factors with whom he is co-operating; these contract negotiation costs could be reduced by organizing a firm because the owner-entrepreneur of the firm is able to direct resources within the firm, hence saving some transaction costs. Furthermore, Coase used a von Thünen concentric circles diagram to depict a single-product firm, as it expands, grows into a multi-product firm. My theory of the ethnically homogeneous [Chinese] middleman group/EHMG (Landa 1981), argued that the EHMG is an organization which reduces the transaction costs of contract enforcement. Using a von Thünen concentric circles diagram, I showed how a rational trader chooses his trading partners, moving from the innermost circle (most trusted partners) outwards to the ethnic boundary as he expands the size of this trading network. The aggregative result of all rational traders’ choice of trading partners is the spontaneous emergence of the EHMG. My 1981 papers together with subsequent published papers on the EHMG have been reprinted in my book, Economic Success of Chinese Merchants in Southeast Asia (Landa 2016); these papers created the “Economics of Identity,” a new subfield, while carrying on the Coasian transaction costs tradition.