From the American Economics Association (where Demesetz was a Distinguished Fellow in 2013):
Harold Demsetz is one of the most creative and deep microeconomists of the 20th century. Several of his contributions anticipated subsequent research by years or even decades, and have offered unusually insightful analyses of fundamental problems of economic theory.
Demsetz’s most famous paper “Production, Information Costs, and Economic Organization” (with Armen Alchian, American Economic Review 1972) is one of the most cited papers in all of economics. It analyzes the fundamental question first raised by Coase, “What is a firm?” and tries to understand the difference between contracts occurring inside the firm (for example, with employees) and those occurring in the market (for example, with customers). Alchian and Demsetz argue that some contracts are efficiently brought inside the firm because doing so reduces the costs of monitoring of performance, especially when production occurs in teams. Alchian and Demsetz’s approach has been challenged by more recent developments, such as Grossman and Hart (1986), but remains a classic in the theory of the firm.