An Evolutionary Theory of the Firm

Abstract

Organizational economics has long inspired management scholars interested in theorizing about firms, but recent literature questions if it can help management research and practice deal with the problems of contemporary firms. This paper develops a theory of the firm that takes a fundamentally different approach than traditional organizational economics to answering the classical question ‘Why do firms exist’ and yet continues to build on economic concepts. Rather than seeing the existence of firms as a puzzle in the context of neoclassical theory, their existence is seen as a puzzle in the context of evolutionary theory – defined as a theory that explains human behavior and organization in terms of gene-culture co-evolution. Evolutionary theory suggests that firms can be understood as contemporary solutions to the collective action problems that emerge when agents become interdependent. During human evolution, solutions to collective action problems emerged as a result of the co-evolution of moral sentiments and social norms. Firms are modern instantiations of this logic: they are legal entities based on institutionalized norms that allow stakeholders to overcome collective action problems by appealing to their moral sentiments. This theory overturns some of the most basic assumptions in organizational economics, but at the same time offers an integrative approach to solving the main problems that it has raised.