Birth of New Firms: Knowledge is Key

Ever since Ronald Coase posed the question in 1937 -“Why do firms exist?”-, all the answers given have explained the genesis of firms o­nly in terms of the need to economize o­n costs, such as transaction costs, agency costs, and supervision and monitoring costs. In their paper “Dispersed Knowledge and an Entrepreneurial Theory of the Firm”, Nicholas Dew of the Naval Postgraduate School, S. Ramakrishna Velamuri of IESE Business School, and Sankaran Venkataraman of Darden Graduate School of Business offer an alternative explanation by arguing that the dispersion of economic knowledge over people and places and over time leads to uncertainty, which, combined with heterogeneous expectations, and the nexus of an individual and opportunity, is the rationale for the emergence of new firms.

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