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Entrepreneurship and the Economic Theory of the Firm - Any Gains from Trade

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Although they have developed very much in isolation from each other, we argue the theory ofentrepreneurship and the economic theory of the firm are closely related, and each has much tolearn from the other. In particular, the notion of entrepreneurship as judgment associated withFrank Knight and some Austrian school economists aligns naturally with the theory of the firm.In this perspective, the entrepreneur needs a firm, that is, a set of alienable assets he controls, tocarry out his function. We further show how this notion of judgment adds to the key themes inthe modern theory of the firm (i.e., the existence, boundaries, and internal organization). In ourapproach, resource uses are not data, but are created as entrepreneurs envision new ways ofusing assets to produce goods. The entrepreneur’s decision problem is aggravated by the factthat capital assets are heterogeneous. Asset ownership facilitates experimentingentrepreneurship: Acquiring a bundle of property rights is a low cost means of carrying outcommercial experimentation. In this approach, the existence of the firm may be understood interms of limits to the market for judgment relating to novel uses of heterogeneous assets; and theboundaries of the firm, as well as aspects of internal organization, may be understood as beingresponsive to entrepreneurial processes of experimentation.Key words: Entrepreneurship, heterogeneous assets, judgment, ownership, firm boundaries,internal organization.JEL Codes: B53, D23, L2

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Nicolai J. Foss, Peter G. Klein

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