Original and derived judgment : an entrepreneurial theory of economic organization
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 assets,
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.
Publisher
Norwegian School of Economics and Business Administration. Department of Strategy and ManagementSeries
Discussion paper2006:1