Extending Amartya Sen’s Paretian liberal paradox to a firm’s hierarchy

Amartya Sen’s impossibility of a Paretian liberal underscores the trade-off between two widely applied social principles—liberalism and Pareto-optimality: “If someone does have certain liberal values, then he [or she] may have to eschew his [or her] adherence to Pareto optimality” (Sen 1970a:157). This paper extends the Paretian liberal paradox to the firm, understood as a socio-economic institution with a hierarchical nature and aimed at enhancing the efficiency of transactions in a world where the costs of market transactions are positive and relevant (Coase 1937). The paper shows that, even if the firm’s hierarchical nature ensures Pareto optimality, it may conflict with liberal values.