Finance and Technology: a Comparative Institutional Analysis of the Firm

In this paper we investigate a rationale for co-evolution of financial and technological structures in modern firms according to the Comparative Institutional Analysis Approach (CIA). Starting from the ‘Transaction Costs Approach’ (TCE) to the analysis of the relationship between corporate governance and corporate finance (Williamson, 1988) we show, by a very simple model, the emergence of financial and technological equilibria in a given institutional context. While the TCE’s Approach describes a direction of causality moving from asset specificity to the financial structure of the firm, and thus to its governance structure, we observe that an opposite direction of causality may also hold: financiers, seeking appropriate safeguards for financial investments within the firm, could influence the emergence of generic (re-deployable) or specific assets according to their preferences on expected residual income and/or to the legal bankruptcy system enforced by judicial authorities. However, if both the direction of causality hold some self-enforcing equilibrium could prevail in an incomplete contract framework. We explicitly consider the ways in which alternative forms of finance can influence and be influenced by technology and the cases in which equity- capital is likely to prevail over debt-capital. It is then suggested that the emergence of the diversity of corporate governance models may be explained in terms of the historical conditions governing the path dependency and the institutional complementarities between ‘Technology’ and ‘Finance’.