The paper presents a conception of firms’ efficiency that breaks with the agency theory of the firm, which sees the efficiency of firms as no different in nature from that of markets. We argue that firms are efficient relative to markets thanks to two kinds of social interaction, namely, interpersonal interactions and compliance with authority; these interactions take place among workers engaged in a collective productive venture and could not develop in markets. Two kinds of norm emerge from these interactions that create the rights and obligations needed for horizontal and vertical cooperation; the functioning of firms and their specific efficiency thus have a deontic basis. Just as shareholder-oriented governance is normatively derived from agency theory’s vision of the firm, which has succeeded in powerfully influencing corporate law and corporate governance since the 1980s, participatory governance is the governance mode that normatively derives from our understanding of the firm.

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Theory of the firm,Deontic basis,Authority,Codetermination,Corporate governance

• Economics and Business - Social Sciences