Competence as a Random Variable: One More Tribute to Ronald Coase

Coase Conference: Markets, Firms and Property Rights: A Celebration of the Research of Ronald Coase, University of Chicago Law School.  Richard A. Epstein, James Parker Hall Distinguished Service Professor of Law at the University of Chicago.

The work of Ronald Coase is notable for how it introduces the notion of transactions costs to explain both the creation and maintenance of firms and for understanding the larger question of social costs. Nonetheless, it seems improbable that positive transaction costs are the only explanation as to why and how firms are organized. A richer account of the problem properly stresses that differences in individual levels of competence, as well as individual variations on matters of temperament and taste, which help to explain why, for example, some firms are organized as partnerships and others as straight employment arrangements, with many permutations in between. The stress on differential levels of competence also helps to improve the understanding not only in related areas such as employment discrimination law, but also in more distant areas such as capital markets and tort liability.

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