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Corporate Culture as a Theory of the Firm

Author

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  • Gary B. Gorton
  • Alexander K. Zentefis

Abstract

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.

Suggested Citation

  • Gary B. Gorton & Alexander K. Zentefis, 2020. "Corporate Culture as a Theory of the Firm," NBER Working Papers 27353, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:27353
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    References listed on IDEAS

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    Cited by:

    1. Olena F. Androsova & Natalia V. Katkova, 2022. "Diagnostics of Corporate Culture on Machine-Building Enterprises in Ukraine," Economic Studies journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 3, pages 149-161.

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    More about this item

    JEL classification:

    • D02 - Microeconomics - - General - - - Institutions: Design, Formation, Operations, and Impact
    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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