How Does Opportunistic Behavior Influence Firm Size

This paper relates firm size and opportunism by showing that, given certain behavioral dispositions of humans, the size of a profit-maximizing firm can be determined by cognitive aspects underlying firminternal cultural transmission processes. We argue that what firms do better than markets – besides economizing on transaction costs – is to establish a cooperative regime among its employees that keeps in check opportunism. A model depicts the outstanding role of the entrepreneur or business leader in firminternal socialization processes and the evolution of corporate cultures. We show that high opportunismrelated costs are a reason for keeping firms’ size small.