Optimal Size of Firm as a Problem in Transaction Costs and Property Rights

The article examines the firm from the perspective of transaction costs and property rights analysis. It is concluded that in the absence of transaction costs, indivisibilities and diseconomies can be dealt with through market transactions, and size of firm is independent of technological considerations. In such circumstances, size of firm is indeterminate in neoclassical theory irrespective of initial assumptions regarding market structure. It is argued that Neoclassical theory is self‐contradictory in its assumptions and that an institutionalist approach to the theory of the firm is required to resolve problems of this nature.