Working Paper Series, Department of Industrial Economics & Strategy, Copenhagen Business School
Extending the Constitutional Theory of the Firm by Introducing Conventions
Abstract: In this paper, it will be argued that unanimous agreement
as the ultimate criterion of goodness in constitutional political economy
corresponds better with the analysis of the firm than it does with the
analysis of much larger organisations, such as nation states. The aim of
the paper is also to argue that conventions play a central role in the
attainment of a social contract. Conventions enter the explanation in two
ways. Firstly, they are logically prior to agreement, and secondly, as it
is argued here, it is convention that carries behavioural influence through
ongoing, collective interpretative effort, rather than the agreed explicit
rule itself. A social contract upon a rule is here seen as the outcome of
the process by which shared expectations emerge and change. Furthermore, as
soon as a rule is agreed upon, it is the collective process by which the
rule’s meaning is reinterpreted in future unforeseen situations that
explains behavioural constraints, not the rule as a principle itself. The
paper also connects the present approach to other theories of the firm.
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