With the rising success of the theory of the firm, questions of why firms exist, what determines their boundaries, and how their internal organization is governed have become very important in economics. Interestingly, these issues are still centered in the sphere of exchange. Exchanges and bundles of contracts are objects of governance. What has been overlooked, however, is the sphere of production. The reason for this is the assumption that the production functions of competing firms or alternative institutional arrangements are more or less identical. Yet, giving precedence to exchange has consequences for governing firms.