Evidence item

QuantEcon’s exposition supports the theoretical link between transaction costs and firm size, including the limiting case where firms have zero size in a zero-transaction-cost model; it is a stylized implication, not a prediction that all real-world firms will vanish. DIRECT_TEXT

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Source: Coase’s Theory of the Firm — Advanced Quantitative Economics with Python · locator {} · excerpt hash sha256:5892fb8b89a11d33d848ffbde3f838015a568ffdc4b3c09d72977884477a55bc

The issue of why firms exist is a binary question: should firms have positive size or zero size? The answer Coase came up with was that “a firm will tend to expand until the costs of organizing an extra transaction within the firm become equal to the costs of carrying out the same transaction by means of an exchange on the open market…” Firms exist because of transaction costs.