Original and Derived Judgment: An Entrepreneurial Theory of Economic Organization

Kirsten Foss, Nicolai J. Foss, Peter G. Klein

    Research output: Working paperResearch

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    Abstract

    Recent work links entrepreneurship to the economic theory of firm using the Knightian concept of entrepreneurship as judgment. When judgment is complementary to other as-sets, and these assets or their services are traded in well-functioning markets, it makes sense for entrepreneurs to hire labor and own assets. The entrepreneur's role, then, is to arrange or organize the human and capital assets under his control. We extend this Knightian concept of the firm by developing a theory of delegation under Knightian uncertainty. What we call original judgment belongs exclusively to owners, but owners may delegate a wide range of decision rights to subordinates, who exercise derived judgment. We call these employees "proxy-entrepreneurs," and ask how the firm's organizational structure — its formal and informal systems of rewards and punishments, rules for settling disputes and renegotiating agreements, means of evaluating performance, and so on — can be designed to encourage forms of proxy-entrepreneurship that increase firm value while discouraging actions that destroy value. Building on key ideas from the entrepreneurship literature, Austrian economics, and the economic theory of the firm we develop a framework for analyzing the tradeoff between productive and destructive proxy-entrepreneurship. We link this analysis to the employment relation and ownership structure, providing new insights into these and related issues in the economic theory of the firm.
    Original languageEnglish
    Place of PublicationKøbenhavn
    PublisherCenter for Strategic Management and Globalization
    Number of pages28
    ISBN (Print)8791815258
    Publication statusPublished - Apr 2006
    SeriesSMG Working Paper
    Number8/2006

    Keywords

    • Judgment
    • Entrepreneur
    • Delegation
    • Employment relation
    • Ownership

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