Firm theories in neoclassical institutional economics

Abstract This paper defines the “new” institutional economics pioneered by Coase's contributionas “neoclassical” institutional economics. It develops the firm theory on the basis of criticizing neoclassical economics for treating firms as black boxes. Coase's contribution is ground‐breaking: He created the transaction cost theory, reinterpreted the origin and essence of firms and the changes in firm size, and analyzed the internal power structure of firms from a contractual perspective. The follow‐up economists build incomplete contract theory, principal–agent theory, team production theory, corporate governance theory, mechanism design theory, and comparative institutional advantage theory to further develop the firm theory. Finally, according to the characteristics of China's economy, this paper provides the future direction of the firm theory.