The emergence of a new economy: An O-Ring approach

The O-Ring theory provides a framework for analyzing the effects of team production on the emergence of firms in the New Economy. Given risk-aversion of the potential team members, the productive advantage of perfect ability matching in teams suffices to establish an equilibrium which separates Old and New Economy. In particular, it is not necessary to assume that firms in the New Economy possess exclusive access to a superior production technology. It must only be true that individual abilities can be observed in partnerships which self-manage production and consequently distribute the surplus among the team members. At the same time, abilities remain private information of the employees in managed firms organized on behalf of a profit-maximizing residual claimant.