Compiled by
Updated June 2007
WELCOME to the world of transaction cost economics.
This bibliography is a compilation of research on transaction cost economics. The bibliography is not intended to be an exhaustive listing. Rather, it is designed to be a "starting point" for those interested in economic theories of organizations and institutions, particularly within the transaction cost perspective.
The bibliography is divided into three main sections: theoretical, empirical, and institutional issues. These divisions are not exact, as many empirical papers also make a strong theoretical contribution to transaction cost economics. Similarly, the categories within each division are only approximate; many articles easily fit into several categories. Nevertheless, I have made every effort to fit the papers and books as closely as possible to the main theoretical or empirical contribution of the work. I have also included sections on papers offering summaries of transaction cost economics, textbooks incorporating the transaction cost framework into the presentation of economic and organizational theories, and journals advancing the transaction cost literature.
While many of the papers listed here have summaries (SU) or abstracts (AB), most are simply listed, with no description or explanation of content or context. I will add summaries or abstracts as time permits.
For additional information on transaction cost economics, especially with respect to contracting issues, visit the Internet sites of the Contracting and Organization Research Institute and the International Society for New Institutional economics.
If you have any comments, suggestions for improvement, or know of papers or books that should be listed here, please e-mail me at hjames@missouri.edu.
Baker, George, Robert Gibbons, and Kevin J. Murphy, (1997) "Relational Contracts and the Theory of the Firm," SSRN paper at http://papers.ssrn.com/paper.taf?abstract_id=2211.
· AB: We combine Simon's conception of relational contracts with Grossman and Hart's focus on asset ownership. We analyze whether transactions should occur under vertical integration or non-integration, and with or without self-enforcing relational contracts. These four models allow us to re-run the horse race Coase proposed between markets and firms as alternative governance structures, but with four horses rather than two. We find that efficient ownership patterns are determined in part by the relational contracts that ownership facilitates, that vertical integration is an efficient response to widely varying supply prices, and that high-powered incentives create bigger reneging temptations under integration than under non-integration.
Baysinger, B.D., and Butler, (1985) "The Role of Corporation Law in the Theory of the Firm," Journal of Law and economics, 28, 179.
· AB: The corporation is a nexus of contracts. Some scholars have argued that the contractual view of the firm implies that markets will lead managers to adopt optimal governance structures and that legal rules are irrelevant. The latter claim is implausible because markets do not operate costlessly. Legal rules may reduce the cost of reaching and adhering to optimal contracts, but the particulars of optimal contracts differ from firm to firm. For example, the optimal structure for a closely held firm is not the same as that of a firm with widely scattered holdings. This implies that state corporation laws also should differ and that firms will select their state of incorporation adaptively. We offer data to support this implication of agency theory.
Boisot, Max, and John Child, (1988) "The Iron Law of Fiefs: Bureaucratic Failure and the Problem of Governance in the Chinese Economic Reforms," Administrative Science Quarterly, 33(December), 507-527.
· AB: This paper argues that the current markets and hierarchies framework of transaction-cost economics provides too limited a set of transactional options to account adequately for many of the organizational problems encountered in developing economies. Focusing on the codification and diffusion of information, it provides a set of concepts designed to extend the existing framework. Applying these concepts to an analysis of the economic reforms in the People’s Republic of China since 1978, the paper identifies a form of bureaucratic failure that lies beyond the markets-hierarchies typology and that high-lights the important role played by culture and the level of development in shaping transactional preferences.
Bolton, Patrick, and Mathias Dewatripont, (1994) "The Firm as a Communication Network," Quarterly Journal of economics, 109(4), 809-839.
· AB: This paper analyzes how organizations can minimize costs of processing and communicating information. Communication is costly because it takes time for an agent to absorb new information sent by others. Agents can reduce the time by specializing in the processing of the particular types of information. When these returns to specialization outweigh costs of communication, it is efficient for several agents to collaborate within a firm. It is shown that efficient networks involve centralization, that individuals delegate tasks to subordinates only if they are overloaded, and that the number of transits to the top tends to be equalized across individual information items.
Casson, Mark, and Nigel Wadeson, (1998) "Communication Costs and the Boundaries of the Firm," International Journal of the economics of Business, 5(1), 5-27.
· AB: Much has been written about where the boundaries of the firm are drawn, but little about what occurs at the boundaries themselves. When a firm subcontracts, does it inform its suppliers fully of what it requires, or is it willing to accept what they have available? In practice firms often engage in a dialogue, or conversation, with their suppliers, in which at first they set out their general requirements, and only when the supplier reports back on how these can be met are their more specific requirements set out. This paper models such conversations as a rational response to communication costs. The model is used to examine the impact of new information technology, such as CAD/CAM, on the conduct of subcontracting. It can also be used to examine its impact on the marketing activities of firms. The technique of analysis, which s based on the economic theory of teams, has more general applications, too. It can be used to model all the forms of dialogue involved in the process of coordination both within and between firms.
Cheung, Stephen N.S., (1983) "The Contractual Nature of the Firm," Journal of Law and economics, 26(1), 1-21.
· SU: Cheung suggests that it is difficult, but not vital, to "know" precisely what a firm is. A firm is a shorthand way of characterizing a particular type of contract distinct from market exchanges. Cheung's primary contribution with this paper is to offer a number of insights regarding firm organization. For instance, he states that while "market transactions involve products or commodities ... 'firm transactions' involve factors of production." Thus, the growth of a firm may represent the "replacement of a product market by a factor market." He also states that it is not appropriate to say that a "firm" supersedes a "market;" rather, one type of contracting supersedes another type. Thus, the factor market differs from the product market in that in the former case a factor owner surrenders a set of rights over the input in exchange for income. In addition, Cheung asks the famous question: "If an apple orchard owner contracts with a beekeeper to pollinate his fruits, is the result one firm or two firm?" Cheung's answer: there is "no clear answer."
Coase, Ronald H., (1937) "The Nature of the Firm," Economica, 4(n.s.), 1937, 386-405. Reprinted in R.H. Coase, (1988) The Firm, the Market, and the Law, Chicago: University of Chicago Press, 33-55.
· SU: Coase is concerned with the question of why firms exist in a market economy. His discussion focuses on the costs of using the price mechanism. For instance, it may be costly to determine appropriate transfer prices. Coase states that outside a firm price movements direct production and exchange, whereas inside the firm production and exchange is coordinated by an entrepreneur. Thus, the "distinguishing mark of the firm is the supersession of the price mechanism." However, Coase also considers the question of why there are any "markets" at all. He suggests that there are costs to coordinating internally, just as there are costs to coordinating through market mechanisms. He concludes that "at the margin, the costs of organizing within the firm will be equal either to the costs of organizing in another firm or to the costs involved in leaving the transaction to be 'organized' by the price mechanism."
Demsetz, Harold, (1988) "The Theory of the Firm Revisited," Journal of Law, economics, and Organization, 4(1), 141-162.
· SU: Demsetz introduces the importance of information costs in transacting and managing production and exchange. He notes that the relevant question "is not whether management cost is more or less than transaction cost, but whether the sum of management and transaction cost incurred through in-house production is more or less than the sum of management and transaction cost incurred through purchase across markets." Internal versus external costs of production are also important to consider. Corporate charters, long-term associations, and the conscious direction of resources identify firm-like organization. Demsetz concludes that "the vertical boundaries of a firm are determined by the economics of conservation of expenditures on knowledge."
Hodgson, Geoffrey M., (2002) "The Legal Nature of the Firm and the Myth of the Firm-Market Hybrid," International Journal of the economics of Business, 9(1), 37-60.
· AB: A sharp conceptual distinction used to be drawn between the firm and the market. However, since the 1970s, many economists and sociologists have argued that the boundaries of the firm are indistinct. Ideas emerged of 'internal markets' within firms, of the 'quasifirm', of 'hybrid firms' and of firms as 'quasi-markets'. This article re-examines the formal, legal conception of the firm. It is argued that there is no good reason to abandon this conception, even in the light of relational contracting, networking, subcontracting and other developments. To avoid confusion, additional terms such as 'supplier network' or 'conglomerate' should be used to describe these phenomena, rather than abandoning a legally-based definition of the firm. With this clarified definition, 'internal markets' and 'hybrid firms' disappear from view.
Holmstrom, Bengt, and Paul Milgrom, (1994) "The Firm as an Incentive System," American Economic Review, 84(4), 972-991.
· AB: We explore the twin hypothesis (1) that high-performance incentives, worker ownership of assets, and worker freedom from direct controls are complementary instruments for motivating workers, and (2) that such instruments can be excepted to covary positively in cross-sectional data. We also relate our conclusions to empirical evidence, particularly that on the organization, compensation, and management of sales forces.
McManus, J.C., (1975) "The Costs of Alternative Economic Organizations," Canadian Journal of economics, 8, 334.
· AB: The paper addresses the questions Why are centralized organizations, such as firms, chosen in preference to a price system to allocate resources? We assume that the choice is based on maximization of the consumption possibilities of the relevant group; therefore, the least inefficient method of allocation will be chosen. Organizations of any kind consist of behaviour constraints, which serve to direct individual behaviour towards the mutual interest of the relevant group. These constraints, whether prices or management directives, are costly to enforce. Enforcement costs are treated as equivalent to the costs of detecting changes in activities, such as the quality of goods and work effort. Because price constraints are costly to enforce and because different types of constraints will have differing costs of enforcement, the latter provide an economic basis for choice among different forms of organization.
Moore, John, (1992) "The Firm as a Collection of Assets," European Economic Review, 36, 493-507.
· AB: The thesis of this paper is that human capital is inalienable: it cannot be bought or sold. Control of physical capital provides the means by which one agent influences another. That is, the pattern of property rights over physical assets is important in the determination of incentives. Recent joint work with Oliver Hart uses this idea in two interrelated ways: Viewing the firm as a collection of assets, our first paper analyses how the incentives of employees are affected by changes in ownership. In section 2, I present an extended example to show that the theory can explain some basic notions - e.g., why firms may initially have increasing returns, and then have decreasing returns. The analysis here assumes away wealth constraints. Once the need for firms to raise money is taken into account, the control of physical capital has another function - that of providing incentives to repay investors. This is the topic of section 3, which presents a simple variant of a model of debt taken from our second paper.
Ouchi, William G., (1980) "Markets, Bureaucracies, and Clans," Administrative Science Quarterly, 25(March), 129-141.
· AB: Evaluating organizations according to an efficiency criterion would make it possible to predict the form organizations will take under certain conditions. Organization theory has not developed such a criterion because it has lacked a conceptual scheme capable of describing organizational efficiency in sufficiently microsopic terms. The transactions cost approach provides such a framework because it allows us to identify the conditions which give rise to the costs of mediating exchanges between individuals: goal incongruence and performance ambiguity. Different combinations of these causes distinguish three basic mechanisms of mediation or control: markets, which are efficient when performance ambiguity is low and goal incongruence is high; bureaucracies, which are efficient when both goal incongruence and performance ambiguity are moderately high; and clans, which are efficient when goal incongruence is low and performance ambiguity is high.
Wiggins, Steven N., (1990) "The Comparative Advantage of Long-term Contracts and Firms," Journal of Law, economics, and Organization, 6(1), 155-170.
· AB: This paper analyzes the choice between long-term contracts and firms. The basic setup is a two-stage version of a vertical integration problem. In stage one, the upstream and downstream managers, respectively, expend cost-reducing and revenue-enhancing effort. In the second stage, managers observe private information about upstream costs and downstream revenues, and a quantity decision is made. This paper focuses on the ex ante choice between long-term contracts and firms, before specific investments.
Williamson, Oliver E., (1979) "Transaction Cost Economics: The Governance of Contractual Relations," Journal of Law and economics, 22(2), 233-261.
· SU: Williamson identifies the critical dimensions of characterizing a transaction and links these to the institutional governance structures of transactions. The principal dimensions describing a transaction are uncertainty, frequency of exchange, and the degree to which investment are transaction-specific. "The efficient organization of economic activity entails the matching of governance structures with these transactional attributes in a discriminating way." He concludes that non-specific transactions are efficiently organized by markets, while recurrent transaction-specific exchanges are more efficiently governed internally.
Williamson, Oliver E., (1980) "The Organization of Work," Journal of Economic Behavior and Organization, 1, 5-38.
· AB: Sociologists, radical economists, and others who claim that hierarchical modes of organization are explained by power rather than efficiency neglect transaction costs in reaching this conclusion. This is understandable, since neoclassical economics also neglects transaction costs. But it is also regrettable, since the transaction costs that arise when intermediate product is transferred across technologically separable stages of production depends crucially on organizational structure. A microanalytic assessment of alternative modes of organization entails (1) an identification of the relevant transaction cost dimensions for assessing performance, (2) a description of the organizational and operating properties of alternative modes, and (3) a comparative evaluation of alternative modes in terms of their transaction cost attributes. transaction costs drive organizational outcomes in considerable degree.
Williamson, Oliver E., (1991) "Comparative Economic Organization: The Analysis of Discrete Structural Alternatives," Administrative Science Quarterly, 36, 269-296.
· AB: This paper combines institutional economics with aspects of contract law and organization theory to identify and explicate the key differences that distinguish three generic forms of economic organization-market, hybrid, and hierarchy. The analysis shows that the three generic forms are distinguished by different coordinating and control mechanisms and by different abilities to adapt to disturbances. Also, each generic form is supported and defined by a distinctive type of contract law. The cost-effective choice of organization form is shown to vary systematically with the attributes of transactions. The paper unifies two hitherto disjunct areas of institutional economics-the institutional environment and the institutions of governance-by treating the institutional environment as a locus of parameters, changes in which parameters, changes in which parameters bring about shifts in the comparative costs of governance. Changes in property rights, contract law, reputation effects, and uncertainty are investigated.
Alchian, Armen, (1984) "Specificity, Specialization, and Coalitions," Journal of Economic Theory and Institutions, 140, 34-39.
Arrow, Kenneth J., (1969) "The Organization of Economic Activity: Issues Pertinent to the Choice of Market Versus Nonmarket Allocation," in The Analysis and Evaluation of Public Expenditure: The PPB System, vol. 1, U.S. Joint Economic Committee, 91st Congress, 1st Session, Washington, DC: U.S. Government Printing Office, 59-73.
Bolton, Patrick, and David S. Scharfstein, (1998) "Corporate Finance, the Theory of the Firm, and Organizations," Journal of Economic Perspectives, 12(4), 95-114.
Cheung, Stephen N.S., (1969) "Transaction Costs, Risk Aversion, and the Choice of Contractual Arrangements," Journal of Law and economics, 12(1), 23-42.
Coase, Ronald H., (1988) "The Nature of the Firm: Origin, Meaning, Influence" Journal of Law, economics, and Organization, 4(1), 3-47.
Demsetz, Harold, (1968) "The cost of Transacting," Quarterly Journal of economics, 82, 33-53.
Hart, Oliver, (1989) "An Economist's Perspective on the Theory of the Firm," Columbia Law Review, 89(7), 1757-1774.
Holmstrom, Bengt, and John Roberts, (1998) "The Boundaries of the Firm Revisited," Journal of Economic Perspectives, 12(4), 73-94.
Kay, N.M., (1992) "Markets, False Hierarchies and the Evolution of the Modern Corporation," Journal of Economic Behavior and Organization, 17(3), 315-333.
Keren, M., and D. Levhari, (1983) "The Internal Organization of the Firm and the Shape of Average Costs," Bell Journal of economics, 14, 474-486.
Klein, Benjamin, (1980) "Transaction Cost Determinants of 'Unfair' Contractual Arrangements," American Economic Review, 70, 356-362.
Masten, Scott E., (1986) "Institutional Choice and the Organization of Production: The Make-or-Buy Decision," Journal of Institutional and Theoretical economics, 142(3), 493-509.
Masten, Scott E., (1988) "A Legal Basis for the Firm," Journal of Law, economics, and Organization, 4(1), 181-198.
Masten, Scott E., (1993) "Transaction Costs, Mistakes, and Performance: Assessing the Importance of Governance," Managerial and Decision economics, 14, 119-129.
Masten, Scott E., James W. Meehan, Jr., and Edward A. Snyder, (1991) "The Costs of Organization," Journal of Law, economics, and Organization, 7(1), 1-26.
Simon, Herbert A., (1991) "Organizations and Markets," Journal of Economic Perspectives, 5(2), 25-44.
Teece, David J., (1982) "Towards an Economic Theory of the Multiproduct Firm," Journal of Economic Behavior and Organization, 3(1), 39-63.
Teece, David J., (1982) "Transaction Cost Economics and the Multinational Enterprise," Journal of Economic Behavior and Organization, 7, 21-45.
Williamson, Oliver E., (1967) "Hierarchal Controls and Optimum Firm Size," Journal of Political Economy, 75(2), 123-139.
Williamson, Oliver E., (1988) "The Logic of Economic Organization," Journal of Law, economics, and Organization, 4(1), 65-94.
Williamson, Oliver E., (1992) "Markets, Hierarchies, and the Modern Corporation," Journal of Economic Behavior and Organization, 17(3), 335-352.
Winter, Sidney G., (1988) "On Coase, Competence, and the Corporation," Journal of Law, economics, and Organization, 4(1), 163-180.
Zenger, Todd R., and William S. Hesterly, (1994) "The Disaggregation of U.S. Corporations: Explaining a Convergence Toward Internal and External Networks of Small, Autonomous Teams," unpublished manuscript, Simon School of Business, Washington University in St. Louis.
Aoki, Masahiko, Bo Gustafsson, and Oliver E. Williamson (eds.), (1990) The Firm as a Nexus of Treaties, Swedish Collegium for Advanced Study in the Social Sciences series, Newbury Park, CA: Sage.
Knight, Frank H., (1921) Risk, Uncertainty, and Profit, New York: Hart, Schaffner, and Marx. Reprinted (1965) New York: Harper and Row.
Rao, P.K., (2002) The economics of transaction Costs: Theory, Methods, and Applications, London: Palgrave-MacMillan.
Williamson, Oliver E., (1975) Markets and Hierarchies: Analysis and Antitrust Implications, New York: The Free Press.
Williamson, Oliver E., (1985) The Economic Institutions of Capitalism, New York: The Free Press.
Williamson, Oliver E., and Sidney G. Winters (eds.) (1993) The Nature of the Firm: Origins, Evolution, and Development, New York: Oxford University Press.
Williamson, Oliver E., (1996) The Mechanisms of Governance, New York: Oxford University Press.
Williamson, Oliver E., and Scott E. Masten (eds.) (1999) The economics of transaction Costs, Edward Elgar.
Hart, Oliver D., (1988) "Incomplete Contracts and the Theory of the Firm," Journal of Law, economics, and Organization, 4(1), 119-140.
· SU: Hart notes that because it is difficult to write and enforce long-term contracts, it may not be possible for contracting parties to specify within the terms of the contract all the rights being transferred over an asset. In these cases it may be optimal for one party to purchase all rights not specifically mentioned in the contract. Ownership of an asset is defined as the "possession of residual rights of control over that asset, that is, the rights to use the asset in any way except to the extent that specific rights have been given away in an initial contract." Hart argues that the allocation of residual rights has efficiency consequences; when the residual rights are purchased by one party they are lost by the other, the effect of which may alter the incentives of the parties involved. He illustrates this point with several examples in which vertical integration overcomes contractual difficulties when investments in assets are relationship-specific. Grossman and Hart conclude that "firm 1 purchases firm 2 when firm 1's control increases the productivity of management more than the loss of control decreases the productivity of firm 2's management."
Klein, Benjamin, Robert G. Crawford, and Armen A. Alchian, (1978) "Vertical Integration, Appropriable Rents and the Competitive Contracting Process," Journal of Law and economics, 21(2), 297-326.
· SU: Klein, Crawford, and Alchian describe the effects of post-contractual opportunism on market contracting and organizational form. They state that when long-term investments in assets are specific, (that is, when the salvage value of an asset is small), the quasi rents generated may be appropriated ex post by contracting agents. Quasi-rents are defined as the difference in the value of the asset in its current and next best use. If quasi-rents are significant, then there is an incentive for investing agents to vertically integrate in order to reduce the risks of the appropriation of quasi-rents by opportunistic individuals. More generally, they state that "if an asset has a substantial portion of quasi rent which is strongly dependent upon some other particular asset, both assets will tend to be owned by one party."
Arrow, Kenneth J., (1975) "Vertical Integration and Communication," Bell Journal of economics, 6, 173-183.
Crocker, Keith J., (1983) "Vertical Integration and the Strategic Use of Private Information," Bell Journal of economics, 14, 236-248.
Grossman, Sanford J., and Oliver D. Hart, (1986) "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Journal of Political Economy, 94(4), 691-719.
Harrigan, K.R., (1969) "A Framework for Looking at Vertical Integration," Journal of Business Strategy, 3(3), 30-37.
Monteverde, Kirk, and David Teece, (1982) "Appropriable Rents and Quasi-Vertical Integration," Journal of Law and economics, 25, 321.
Rabin, Matthew, (1993) "Information and the Control of Productive Assets," Journal of Law, economics, and Organization, 9(1), 51-76.
Riordan, Michael H., (1990) "What is Vertical Integration?" in Masahiko Aoki, Bo Gustafsson, and Oliver E. Williamson (eds.), The Firm as a Nexus of Treaties, Swedish Collegium for Advanced Study in the Social Sciences series, Newbury Park, CA: Sage, 94-111.
Riordan, Michael H., and Oliver E. Williamson, (1985) "Asset Specificity and Economic Organization," International Journal of Industrial Organization, 3, 365-378.
Williamson, Oliver E., (1971) "The Vertical Integration of Production: Market Failure Considerations," American Economic Review, 61, 112-123.
Williamson, Oliver E., (1985) "Vertical Integration: Theory and Evidence," Economic Institutions of Capitalism, New York: The Free Press, chapter 4, 85-102.
Aghion, Philippe, and Jean Tirole, (1997) "Formal and Real Authority in Organizations," Journal of Political Economy, 105(1), 1-29.
· AB: This paper develops a theory of the allocation of formal authority (the right to decide) and real authority (the effective control over decisions) within organizations, and it illustrates how a formally integrated structure can accommodate various degrees of "real" integration. Real authority is determined by the structure of information, which in turn depends on the allocation of formal authority. An increase in an agent's real authority promotes initiative but results in a loss of control for the principal. After spelling out (some of ) the main determinants of the delegation of formal authority within organizations, the paper examines a number of factors that increase the subordinates' real authority in a formally integrated structure: overload, lenient rules, urgency of decision, reputation, performance measurement, and multiplicity of superiors. Finally, the amount of communication in an organization is shown to depend on the allocation of formal authority.
Alchian, Armen, and Harold Demsetz, (1972) "Production, Information Costs, and Economic Organization," American Economic Review, 62, 777-795.
· SU: Alchian and Demsetz show how team production results in organizations characterized as the "classical firm." The problem with team production is that the activities of workers are not perfectly separable; hence, it is not possible to compensate workers based on their marginal inputs. Moreover, workers have an incentive to shirk, or free-ride, on the actions of the other workers by reducing the effort they offer to the team. The reason is that the cost of shirking is not born solely by the individual through a reduction in his compensation. The result is that market contracting for individual contributions is not possible. An organization in which workers are paid a wage by a principal who oversees or monitors the actions of the other workers overcomes the free-riding problem if the principal has claims on the residuals of production (output less the payment of wages and factor costs).
Becker, Gary, and Kevin Murphy, (1992) "The Division of Labor, Coordination Costs, and Knowledge," Quarterly Journal of economics, 107, 1137-1160.
· AB: This paper considers specialization and division of labor. A more extensive division of labor raises productivity because returns to the time spent on tasks are usually greater to workers who concentrate on a narrower range of skills. The traditional discussion of the division of labor emphasizes the limitations to specialization imposed by the extent of the market. We claim that the degree of specialization is more often determined by other considerations. Especially emphasized are various costs of "coordinating" specialized workers who perform complementary tasks, and the amount of general knowledge available.
Calvo, Guillermo A.R., and S. Wellisz, (1978) "Supervision, Loss of Control, and the Optimal Size of the Firm," Journal of Political Economy, 86, 943-952.
· AB: We show that limitation of firm size caused by loss of control across hierarchic levels depends crucially on the nature of the supervision process. If the employees cannot identify the times at which their performance is monitored, there is no limit imposed of the firm size by the heights of the hierarchical structure. "Loss of control" may impose such a limit if the employees are aware of the times at which they are being monitored. The analysis also shows the rationale for hierarchical wage differentials for essentially identical employees.
Fumas, Vincente Salas, (1993) "Incentives and Supervision in Hierarchies," Journal of economics Behavior and Organization, 21, 315-331.
· AB: This paper describes a simple, and therefore limited, model for incentives design under imperfect hierarchical supervision, in order to explain certain empirical evidence on the relative importance of bonuses and salaries for the compensation of managers. Some theoretical implications are also derived from the model: first we find that improvements in the activity of supervision do not always imply higher salaries and less incentives, as is implicitly recognized in certain agency models; secondly, the introduction on incentives in a hierarchy which is performing imperfect supervision may not be sufficient to remove the limits to the firm's size which is attributed to this imperfection.
Jensen, Michael C., and William H. Meckling, (1992) "Specific and General Knowledge, and Organizational Structure," in Les Werin and Hans Wijkander (eds.) Contract economics, Cambridge, MA: Blackwell, 251-281.
· AB: In this chapter we analyze the institutional devices through which decision-making rights are assigned in markets and within firms and the devices used to motivate agents to make proper decisions. We focus on how the costs of transferring information between agents influences the organization of markets and firms.
Milgrom, Paul, (1988) "Employment Contracts, Influence Activities, and Efficient Organization," Journal of Political Economy, 96, 42-60.
· AB: When changing jobs is costly, efficient employment contracts usually fail to compensate workers for the effects of posthiring events and decisions. Then, when there are executives and managers with authority to make discretionary decisions, affected employees will be led to waste valuable time trying to influence their decisions. Efficient organization design counters this tendency by limiting the discretion of decision-makers, especially for those decisions that have large distributional consequences but that are otherwise of little consequence to the organization.
Simon, Herbert, (1951) "A Formal Theory of the Employment Relationship," Econometrica, 19(3), 293-305.
· SU: Simon distinguishes between a sales, or market, contract and an employment contract. He also determines the conditions that make employment preferable to market contracting for labor services. Simon defines a sales contract as an agreement to compensate the worker for a specific action selected from a distribution of actions. He defines employment as an arrangement in which the employer chooses from the distribution of actions the particular action for the worker to perform. The worker is willing to accept this arrangement if compensation is such that it does not matter "very much" to the worker what action the employer selects. Simon shows that employment is preferred over a sales contract as the benefit to the firm owner from a specific action by the worker becomes more uncertain. The reason is that at the time the contract is made the owner may not know for certain which action taken by the worker would be the optimal one. Thus, in the face of uncertainty the firm owner will have an incentive to "pay for the privilege of postponing" the action the worker should take by making the worker an employee.
Williamson, Oliver E., Michael L. Watcher, and Jeffrey E. Harris, (1975) "Understanding the Employment Relation: The Analysis of Idiosyncratic Exchange," Bell Journal of economics, 6, 250-278.
· AB: This paper is concerned with jobs for which nontrivial job-specific skills and task-specific knowledge evolve, in a learning by doing fashion, during the course of a worker's employment. Otherwise qualified but inexperienced workers can not be regarded as the equivalent of job incumbents under such circumstances. The underlying factors that give rise to job idiosyncracies and the contractual properties of four alternative contracting modes for jobs of this kind are evaluated with the assistance of what we refer to as the "organizational failures framework." Individualistic contracting modes of the contingent claims contracting, spot contracting, and authority relation types are examined. The implied demands on the rationality limits of human actors are shown to be severe and the associated costs of adapting to changing job and market circumstances are shown to be considerable for jobs of the idiosyncratic kind. Collectivizing the employment agreement alleviates these conditions in that it serves to economize on transaction costs in both bounded rationality and attenuate opportunism. The upshot is that "internal labor markets," which others have interpreted in mainly noneconomic terms, can be supplied with an efficiency rationale -- additionally if not instead.
Calvo, Guillermo A.R., (1987) "The economics of Supervision," in Haig R. Nalbantian (ed.), Incentives, Cooperation, and Risk Sharing: Economic and Psychological Perspectives on Employment Contracts, Totowa, NJ: Rowman & Littlefield, 87-103.
Collins, Hugh, (1993) "Why are There Contracts of Employment?" Journal of Institutional and Theoretical economics, 149(4), 762-768.
Dow, Gregory K., (1987) "The Function of Authority in transaction cost economics," Journal of Economic Behavior and Organization, 8(1), 13-38.
Goldberg, Victor, (1982) "A Relational Exchange Perspective on the Employment Relationship," working paper no. 208, Department of economics, University of California, Davis.
Itoh, Hideshi, (1992) "Cooperation in Hierarchical Organizations: An Incentive Perspective," Journal of Law, economics, and Organization, 8(2), 321-345.
Lazear, Edward P., (1991) "Labor economics and the Psychology of Organizations," Journal of Economic Perspectives, 5(2), 89-110.
Minkler, Alanson P., (1993) "Knowledge and Internal Organization," Journal of Economic Behavior and Organization, 21, 17-30.
Rosen, Sherwin, (1988) "Transaction Costs and Internal Labor Markets," Journal of Law, economics, and Organization, 4(1), 49-64.
Speklé, Roland F., (2001), "Explaining management control structure variety: a transaction cost economics perspective," Accounting, Organizations and Society, 26(4-5), 419-441.
Stigler, George J., (1951) "The Division of Labor is Limited to the Extent of the Labor Market," Journal of Political Economy, 59(3), 185-193.
Stiglitz, Joseph, (1975) "Incentives, Risk and Information: Notes Towards a Theory of Hierarchy," Bell Journal of economics, 6, 552-579.
Stiglitz, Joseph, (1987) "The Design of Labor Contracts: The economics of Incentives and Risk-Sharing," in Haig R. Nalbantian (ed.), Incentives, Cooperation, and Risk Sharing: Economic and Psychological Perspectives on Employment Contracts, Totowa, NJ: Rowman & Littlefield, 47-68.
Tirole, Jean, (1986) "Hierarchies and Bureaucracies," Journal of Law, economics, and Organization, 2, 181-214.
Miller, Gary, (1992) Managerial Dilemmas: The Political Economy of Hierarchy, New York: Cambridge University Press.
Nalbantian, Haig R, (ed.), (1987) Incentives, Cooperation, and Risk Sharing: economics and Psychological Perspectives on Employment Contracts, Totowa, NJ: Rowman & Littlefield.
Fama, Eugene, (1980) "Agency Problems and the Theory of the Firm," Journal of Political Economy, 88(2), 288-307.
· SU: Fama explains how the separation of ownership from control can be an efficient form of organization relative to organizations in which the risk-bearing and decision-making functions are combined. The reason is that gains may be achieved if individuals specialize in either risk-bearing or management activities. The agency problems that may occur under such an organization are mitigated by the managerial labor market.
Hirao, Yukiko, (1993) "Task Assignment and Agency Structures," Journal of economics and Management Strategy, 2(2), 325-332.
· AB: This paper considers an agency model in which a principal delegates an agent authority to choose investment projects. The performance of the project depends stochastically on the agent's evaluation and operating efforts. The paper examines the conditions under which the principal prefers to assign production to a second agent. It is shown that the tasks will be assigned to two agents if the agent chooses an unobservable operating effort. The tasks will be assigned to one agent if the agent's evaluation and operating efforts are both unobservable and if disutilities of efforts are large relative to the profit from the risky project.
Holmstrom, Bengt, (1982) "Moral Hazard in Teams," Bell Journal of economics, 13, 324-340.
· SU: Holmstrom analyzes firm organization in the context of group or team production characterized by the moral hazard problem. Moral hazard occurs when the actions of agents cannot be perfectly observed or contracted for directly. Holmstrom shows that collective punishments and rewards may provide the necessary incentives for workers to produce the desired level of output without the need of a monitor. However, the penalties or rewards required to ensure efficient production are not budget-balancing; penalties will "waste output," while bonuses will "exceed output." Thus, the role of the principal or firm owner is not necessarily to monitor but to "break the budget-balancing constraint." He concludes that capitalistic firms in which the owners do not provide labor services have advantages over proprietorships because of the owners' abilities to finance budget-breaking contractual relationships.
Holmstrom, Bengt, and Paul Milgrom, (1991) "Multitask Principal-Agent Analyses: Incentive Contracts, Asset Ownership, and Job Design," Journal of Law, economics, and Organization, 7(spring), 24-52.
· AB: In this article, we will analyze a principal-agent model that (I) can account for paying fixed wages even when good, objective output measures are available and agents are highly responsive to incentive pay; (II) can make recommendations and predictions about ownership patterns even when contracts can take full account of all observable variables and court enforcement is perfect; (III) can explain why employment is sometimes superior to independent contracting even when there are no productive advantages to specific physical or human capital and no financial market imperfections to limit the agent’s borrowings; (IV) can explain bureaucratic constraints; and (V) can shed light on how tasks get allocated to different jobs.
Jensen, Michael C., and William H. Meckling, (1976) "Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure," Journal of Financial economics, 3, 303-360.
· SU: Jensen and Meckling show how costs arise when the management and ownership functions are separated. The reason is that it is impossible at zero cost for "owners" (or principals) to ensure that "managers" (or agents) act in the owners' interests. These costs, known as agency costs, consist of monitoring expenditures by the principals, bonding payments by the agents, and residual losses. The authors distinguish between pecuniary and non-pecuniary returns and show how managers have incentives to expend larger amounts of resources on non-pecuniary returns when their equity or pecuniary interests in the firm decrease. Organizations characterized by the separation of ownership from control exist because, just as their are costs to equity financing, there are costs to debt financing. The "nexus of contracts" view of firms is attributed to Jensen and Meckling.
Valsecchi, Irene, (1996) "Policing Team Production Through Job Design," Journal of Law, economics, and Organization, 12(2), 361-375.
· AB: This article is concerned with job design, that is, the grouping of tasks into jobs, in teams of risk-neutral homogeneous agents. It shows that when only some tasks are observable by the agents or monitorable by the principle, job design can restrict the set of sequential equilibria to the Pareto optimal one, by making incomplete information from the agents or the principal effective in overcoming coordination failures and conflict among coworkers. Job design is shown to be a constituent part of the overall incentive system, just as efficient compensation rules are. Some criteria for optimal task assignment are derived.
White, William D., (1992) "Information and the Control of Agents," Journal of Economic Behavior and Organization, 18, 111-117.
· AB: Standard principle-agent models examine problems with controlling moral hazard under conditions of imperfect information. This paper explores whether the ability to costlessly monitor agent/employees within a firm with certainty is a sufficient condition to eliminate problems with control. A simple model of employee theft is used to demonstrate that even if theft can always be detected in a timely fashion, problems with control may persist. Implications of this finding are discussed.
Arrow, Kenneth, (1985) "The economics of Agency," in J. Pratt and R. Zeckhauser (eds.) Principals and Agents: The Structure of Business, Boston: Harvard University Press, 37-51.
Fama, Eugene, and Michael Jensen, (1983) "Separation of Ownership and Control," Journal of Law and economics, 26(2), 301-325.
Fama, Eugene, and Michael Jensen, (1983) "Agency Problems and Residual Claims," Journal of Law and economics, 26(2), 327-349.
Fama, Eugene , and Michael Jensen, (1985) "Organizational Forms and Investment Decisions," Journal of Financial economics, 14, 101-119.
Fudenberg, Drew, Bengt Holmstrom, and Paul Milgrom, (1990) "Short Term Contracts and Long Term Agency Relationships," Journal of Economic Theory, 51, 1-31.
Grossman, Sanford J., and Oliver D. Hart, (1980) "Take-over Bids, the Free Rider Problem, and the Theory of the Corporation," Bell Journal of economics, 11, 42-64.
Grossman, Sanford J., and Oliver D. Hart, (1983) "An Analysis of the Principal-Agent Problem," Econometrica, 51, 7-46.
Jensen, Michael C., (1986) "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, 76, 323-329.
Klein, Benjamin, (1983) "Contracting Costs and Residual Claims: The Separation of Ownership and Control," Journal of Law and economics, 26, 367.
Ross, Steven, (1973) "The Economic Theory of Agency: The Principal's Problem," American Economic Review, 63(2), 134-139.
Sappington, David E.M., (1991) "Incentives in Principal-Agent Relationships," Journal of Economic Perspectives, 5(2), 45-66.
Shavell, Stephen, (1979) "Risk Sharing and Incentives in the Principal and Agent Relationship," Bell Journal of economics, 10, 55-73.
Williamson, Oliver E., (1983) "Organization Form, Residual Claimants, and Corporate Control," Journal of Law and economics, 26(2), 351-366.
Berle, Adolph A., and Gardiner C. Means, (1932) The Modern Corporation and Private Property, New York: Macmillan.
Pratt, J., and R. Zeckhauser, (1985) Principals and Agents: The Structure of Business, Boston: Harvard Business School Press.
Akerlof, George A., (1970) "The Market for 'Lemons': Quality Uncertainty and the Market Mechanism," Quarterly Journal of economics, 84(3), 488-500.
· SU: Akerlof describes how uncertainty regarding the characteristics of a product may make market contracting difficult or impossible. He examines the market for used automobiles as an illustration. Because the "market price" of used automobiles reflects the average, rather than actual, quality of cars, owners of cars valued greater than the market price will not wish to offer their cars for sale on the market, while owners of cars valued less than the market price will place their cars on the market. The effect is that average price will be driven down until either "lemons" are left on market or the market completely fails. Akerlof describes how some institutional developments, such as guarantees and brand-name quality, mitigate the adverse effects of product uncertainty exchanged on the market.
Barzel, Yoram, (1982) "Measurement Costs and the Organization of Markets," Journal of Law and economics, 25, 27-48.
· SU: Barzel describes the problems that occur in market contracting because of the difficulty and costliness of measuring and pricing all features of a product. The result is that agents must spend resources on determining unique differences in product quality. One solution is for buyers to examine a proxy of product quality. However, sellers may have an incentive to manipulate the proxy measure rather than the actual quality of the product in response to changes in market prices. Barzel discusses many market and organizational responses to these problems.
Stigler, George J., (1961) "The economics of Information," Journal of Political Economy, 69(3), 213-225.
· SU: Stigler examines how search costs, such as the identification of sellers and the discovery of their prices, affect the economic activities of agents. The time involved in determining the seller with the highest quality products at the lowest price is an example of search cost. Economic agents will search until the expected marginal gains from searching equal the marginal costs of continued searching (e.g. opportunity cost of time). Because search costs can be high for certain types of products, organizations will arise and market innovations will develop to minimize these costs. For instance, advertising is a means of providing information about sellers to buyers and thus lower search costs.
Cheung, Steven N.S., (1977) "Why Are Better Seats 'Underpriced'?" Economic Inquiry, 15(October), 513-522.
Katz, Avery, (1993) "Transaction Costs and the Legal Mechanics of Exchange: When Should Silence in the Face of an Offer Be Construed as Acceptance?" Journal of Law, economics, and Organization, 9(1), 77-97.
Kerr, Steven, (1975) "On the Folly of Rewarding A, While Hoping for B," Academy of Management Journal, 18(December), 769-783.
Myers, S., and N. Majluf, (1984) "Corporate Financing and Investment Decisions When Firms Have Information that Investors Do Not Have," Journal of Financial economics, 13, 187-221.
Rothschild, Michael, and Joseph Stiglitz, (1976) "Equilibrium in Competitive Insurance Markets: An Essay on the economics of Imperfect Information," Quarterly Journal of economics, 90(4), 629-649.
Spence, Michael, (1973) "Job Market Signaling," Quarterly Journal of economics, 87(3), 355-374.
Coase, Ronald H., (1960) "The Problem of Social Cost," Journal of Law and economics, 3(October), 1-44. Reprinted in R.H. Coase, (1988) The Firm, the Market, and the Law, Chicago: University of Chicago Press, 95-156.
· SU: Coase discusses solutions to the problem of negative externalizes. He takes issue with the (then) current proposition that the source of the negative eternality should pay damages, be taxed, or be enjoined from operating. Coase proposed that if it is costless to transact, then it does not matter how you allocate property rights and resources. Property owners could bargain and transfer rights in order to get the efficient allocation. (Coase was not concerned with the distribution of wealth, only the efficient allocation of resources.) Thus, it is not necessary to assign damages or levy taxes. If it is costly to transact, then the initial allocation of property rights is important. This paper is widely cited as the source for the so-called "Coase Theorem," although Coase never used that term.
Hart, Oliver, and John Moore, (1990) "Property Rights and the Nature of the Firm," Journal of Political Economy, 98(6), 1119-1158.
· AB: This paper provides a framework for addressing the question of when transactions should be carried out within a firm and when through the market. Following Grossman and Hart, we identify a firm with the assets that its owners control. We argue that the crucial difference for party 1 between owning a firm (integration) and contracting for a service from another party 2 who owns this firm (nonintegration) is that, under integration, party 1 can selectively fire the workers of the firm (including party 2), whereas under nonintegration he can "fire" (i.e., stop dealing with) only the entire firm: the combination of party 2, the workers, and the firm's assets. We use this idea to study how changes in ownership affect the incentives of employees as well as those of owner-managers. Our framework is broad enough to encompass more general control structures than simple ownership: for example, partnership and worker and consumer cooperatives all emerge as special cases.
Cooter, Robert D., (1987) "Coase Theorem," in John Eatwell, Murray Milgate, and Peter Newman (eds.), The New Palgrave: A Dictionary of economics, London: The Macmillan Press Limited.
Dahlman, Carl J., (1979) "The Problem of Externality," Journal of Law and economics, 22, 141-162.
De Alessi, L. (1973) Private Property and Dispersion of Ownership in Large Corporations," Journal of Finance, 28, 839-851.
De Alessi, L. (1980) "The economics of Property Rights: A Review of the Evidence," Research in Law and economics, 2, 1-47.
De Alessi, L., (1983) "Property Rights, transaction Costs, and X-efficiency," American Economic Review, 73, 64-81.
De Alessi, L. (1990) "Development of the Property Rights Approach," Journal of Institutional and Theoretical economics, 146, 6-23.
Demsetz, Harold, (1964) "The Exchange and Enforcement of Property Rights," Journal of Law and economics, 7, 347-359.
Demsetz, Harold, (1967) "Toward a Theory of Property Rights," American Economic Review, 57, 347-359.
Furubotn, E., and S. Pejovich, (1972) "Property Rights and Economic Theory: A Survey of Recent Literature," Journal of Economic Literature, 10(4), 1137-1163.
Barzel, Yoram, (1989) Economic Analysis of Property Rights, New York: Cambridge University Press.
Anderson, Erin, and David C. Schmittlein, (1984) "Integration of the Sales Force: An Empirical Examination," Rand Journal of economics, 15(3), 385-395.
· AB: This article develops and tests a model of integration of a marketing function, personal selling. The model, derived from transaction cost analysis as developed principally by Williamson, is formulated as a logistic function, which is estimated with data from the electronic components industry. As excepted, integration is associated with increasing levels of asset specificity, difficulty of performance evaluation, and the combination of these two factors. Contrary to the transaction cost model, neither frequency of transactions nor integration of specificity and environmental uncertainty is significantly related to integration. The transaction cost model improves significantly upon the fit of a simple model relating integration to company size alone. These results suggest that for studying transaction of this kind, it is fruitful to view the firm as a governance structure.
Davis-Blake, Alison, and Brian Uzzi, (1993) "Determinants of Employment Externalization: A Study of Temporary Workers and Independent Contracting," Administrative Science Quarterly, 38, 195-223.
· AB: This paper examines what determines the use of temporary workers and independent contractors in a variety of organizations. We hypothesize that four factors affect the use of externalized workers: employment costs, the external environment, organizational size and bureaucratization, and skill requirements. Data from a large sample of employers surveyed by the U.S. Department of Labor were used to test the hypotheses. Analyses showed that each factor affected the use of both temporary workers and independent contractors; however, the effects differed across the two types of workers. Firm-specific training, government oversight, bureaucratized employment practices, establishment size, and requirements for high levels of informational or technical skill had negative effects on organizations' use of temporary workers; variation in employment needs positively affected the use of temporary workers. Variation in employment needs, bureaucratized employment practices, establishment size, and being part of a multiple-site firm had positive effects on the use of independent contractors. We discuss the implications of these findings for the study of the employment relationship.
Klein, Benjamin, (1988) "Vertical Integration as Organized Ownership: The Fisher Body - General Motors Relationship Revisited," Journal of Law, economics, and Organization, 4(1), 199-213.
· SU: Klein presents a detailed case study of one vertical integration -- the General Motors-Fisher Body case. He suggests that the primary costs saved by vertical integration are not associated with the incompleteness of formal contracting, but rather the "costs associated with contractually induced hold-ups." Hold-ups do not arise solely from specific investments, but also from rigid, long-term contract terms "used in the presence of specific investments." To solve the hold-up problem, agents must consider the relative advantages and disadvantages of long-term contracting or vertical integration. Klein shows how vertical integration in the General Motors-Fisher Body case mitigated the hold-up problem created by long-term contracting.
Levy, D.T., (1985) "The transaction cost Approach to Vertical Integration: An Empirical Investigation," Review of economics and Statistics, 67, 438.
· AB: The transaction cost approach developed by Coase and Williamson provides a coherent framework for investigating the determinants of vertical integration in different industries. Empirical implications are developed and then tested using a cross section of firm level data pooled over different time periods. The results tend to confirm hypotheses regarding the internal costs of management, small numbers bargaining problems and the notion of the firm as suited to adaptive sequential decision making under conditions of uncertainty.
Masten, Scott E., (1984) "The Organization of Production: Evidence from the Aerospace Industry," Journal of Law and economics, 27(2), 403-417.
· SU: Masten examines the make-or-buy decision of components used in aerospace production, focusing on both asset specificity and component complexity. Masten uses two measures of asset specificity. The first, "design specificity," measured how exclusive the use of the component is to the company; the second, "site specificity," tested whether the grouping of production processes was important. He finds that specific components are moderately linked to their being produced internally. However, components that are both asset specific and complex are almost always produced in-house rather than purchased from the market. Site specificity did not significantly result in components being produced internally.
Monteverde, Kirk, and David Teece, (1982) "Supplier Switching Costs and Vertical Integration in the Automobile Industry," Bell Journal of economics, 13, 206-213.
· SU: The study by Monteverde and Teece is the first truly systematic empirical study of the relationship between asset specificity and vertical integration. The authors examined the choice between internal production and market procurement of automobile components at General Motors and Ford. Asset specificity is measured by the application of engineering effort to the development of an automobile component, as suggested in their hypothesis: "The greater is the application of engineering effort associated with the development of any given automobile component, the higher are the expected appropriable rents, and therefore, the greater is the likelihood of vertical integration of production for that component." They find that greater applications effort (specificity) increases the likelihood of vertical integration.
Walker, G., and D. Weber, (1984) "A transaction cost Approach to Make-or-Buy Decision," Administrative Science Quarterly, 29, 373.
· AB: This study focuses on make-or-buy decisions as a paradigmatic problem for analyzing transaction costs. Hypotheses developed from Williamson’s efficient boundaries framework were tested in a multiple-indicator structural equation model. The influence of transaction costs on decisions to make or buy components was assessed indirectly through the effects of supplier market competition and two types of uncertainty, volume and technological. In addition to transaction costs, the decisions were hypothesized to be predicted by both buyer production experience and the comparative production costs between buyer and supplier. The hypotheses were tested on a sample of make-or-buy decisions made in a division of a U.S. automobile company. The results show that comparative production costs are the strongest predictor to make-or-buy decisions and that both volume uncertainty and supplier market competition have small but significant effects. The findings are explained in terms of the complexity of the components and the potential pattern of communication and influence among managers responsible for making the decisions.
Anderson, Erin, (1985) "The Salesperson as Outside Agent or Employee: A transaction cost Analysis," Marketing Science, 4, 234-254.
Anderson, Erin, (1988) "Transaction Costs as Determinants of Opportunism in Integrated and Independent Sales Forces," Journal of Economic Behavior and Organization, 9(3), 247-264.
Anderson, Erin, and A.T. Coughlin, (1987) "International Market Entry and Expansion Via Independent or Integrated Channels of Distribution," Journal of Marketing, 51, 71-82.
Armour, H.O., and David J. Teece, (1980) "Vertical Integration and Technological Innovation," Review of economics and Statistics, 62, 470-474.
Balakrishnan, S.,and A. Zardkoohi, (1986) "Technical Change, Competition, and Vertical Integration," Strategic Management Journal, 7, 347-359.
Bjuggren, Per-Olof, (1987) "Vertical Integration in the Swedish Pulp and Paper Industry," Skandinaviska Euskida Banken Quarterly Review, 1, 23-31.
Caves, Richard E., and Ralph M. Bradburd, (1988) "The Empirical Determinants of Vertical Integration," Journal of Economic Behavior and Organization, 9(3), 265-279.
Globerman, Steven, (1980) "Markets, Hierarchies, and Innovation," Journal of Economic Issues, 14, 977-998.
Globerman, Steven, and Richard Schwindt, (1986) "The Organization of Vertically-related Transactions in the Canadian Forest Product Industry," Journal of Economic Behavior and Organization, 7(2), 199-212.
Harrigan, K.R., (1986) "Matching Vertical Integration Strategies to Competitive Conditions," Strategic Management Journal, 7, 535.
Helfat, C., and David Teece, (1987) "Vertical Integration and Risk Reduction," Journal of Law, economics, and Organization, 3, 47-68.
Hennart, Jean-François, (1988) "Upstream Vertical Integration in the Aluminum and Tin Industries," Journal of Economic Behavior and Organization, 9(3), 281-299.
John, George, and Barton A. Weitz, (1988) "Forward Integration into Distribution: An Empirical Test of transaction cost Analysis," Journal of Law, economics, and Organization, 4(2), 337-356.
Joskow, Paul L., (1985) "Vertical Integration and Long-Term Contracts: The Case of Coal-Burning Electrical Generating Plants," Journal of Law, economics, and Organization, 1, 33-80.
Klein, Benjamin, G.L. Frazer, and V.J. Roth, (1990) "A transaction cost Analysis Model of Channel Integration in International Markets," Journal of Marketing Research, 27, 196-208.
Lieberman, M.B., (1991) "Determinants of Vertical Integration: An Empirical Test," Journal of Industrial economics, 39(5), 451-466.
MacDonald, J.M., (1985) "Market Exchange or Vertical Integration: An Empirical Analysis," Review of economics and Statistics, 67, 327.
MacMillan, I., D.C. Hambrick, and J.M. Pennings, (1986) "Uncertainty Reduction and the Threat of Supplier Retaliation: Two Views of the Backward Integration Decision," Organizational Studies, 7, 267.
Masten, Scott E., James W. Meehan, Jr., and Edward A. Snyder, (1989) "Vertical Integration in the U.S. Auto Industry: A Note on the Influence of Specific Assets," Journal of Economic Behavior and Organization, 12(2), 265-273.
Poppo, Laura, and Todd Zenger, (1994) "Strategic Outsourcing: A Comparative Test of Transaction-cost and Resource-based Explanations for Make or Buy Decisions," unpublished manuscript, Simon School of Business, Washington University in St. Louis.
Spiller, P., (1985) "On Vertical Mergers," Journal of Law, economics, and Organization, 1, 285-312.
Walker, G., and D. Weber, (1987) "Supplier Competition, Uncertainty and Make-or-Buy Decisions," Academy of Management Journal, 30, 589.
Whyte, Glen, (1994) "The Role of Asset Specificity in the Vertical Integration Decision," Journal of Economic Behavior and Organization, 23(3), 287-302.
Williamson, Oliver E., (1985) "Vertical Integration: Some Evidence," Economic Institutions of Capitalism, New York: The Free Press, chapter 5, 103-130.
Stuckey, John, (1983) Vertical Integration and Joint Ventures in the Aluminum Industry, Cambridge, MA: Harvard University Press.
Goldberg, Victor P., and John R. Erickson, (1987) "Quantity and Price Adjustment in Long-Term Contracts: A Case Study of Petroleum Coke," Journal of Law and economics, 30(2), 369.
· SU: Goldberg and Erickson examine the price and quantity provisions of contracts for petroleum coke between eight oil refineries and the Great Lakes Carbon Corporation. The contracts were obtained following an investigation by the Federal Trade Commission which charged that the long-term contracts violated antitrust laws. Goldberg and Erickson show that the contracts have transaction cost minimizing features that guard parties from the hazards of transaction-specific investments. The contracts are long-term because of the transaction-specific relationship between the sellers and buyers of petroleum coke. Moreover, the contracts frequently use non-linear prices as a means of protecting the seller's reliance on the buyer to purchase given quantities of output. The contracts support the "relational" view of contracting.
Joskow, Paul L., (1987) "Contract Duration and Relationship-Specific Investment: Empirical Evidence From the Coal Market," American Economic Review, 77(1), 168-185.
· SU: Joskow analyzes coal contracts between coal suppliers and electric utilities. He tests whether the importance of relationship-specific investments are associated with long-term contractual agreements. He uses measures of site specificity, physical asset specificity, and dedicated assets as types of transaction-specific investments. The dependent variable is the duration of the contractual agreement determined ex ante. He finds that increases in the specificity of investments increase the duration of the formal contract.
Leffler, Keith B., and Randal R. Rucker, (1991) "Transaction Costs and the Efficient Organization of Production: A Study of Timber-Harvesting Contracts," Journal of Political Economy, 99(5), 1060-1087.
· SU: Leffler and Rucker adopt the transaction cost framework to explain the choice between lump-sum and per unit payment provisions in private timber-harvesting contracts. They posit that contracting parties will choose the organizational and contractual forms which minimize the costs of transacting, and that transaction cost explanations provide a better explanation than risk-based arguments. They find that in all cases transaction costs are reduced when timber owners transfer standing timber to downstream owners. Leffler and Rucker focus on presale measurement and contract enforcement problems. Using information on timber and harvesting agreements, they find support for the transaction cost minimizing hypotheses and reject risk-based explanations. In particular, when presale measurement costs are relatively low, lump-sum contracts are used. Alternatively, when harvest enforcement costs are relatively low, per-unit contracts are employed.
Acheson, J., (1985) "The Maine Lobster Market: Between Market and Hierarchy," Journal of Law, economics, and Organization, 1, 385.
Alston, Lee J., and R. Higgs, (1982) "Contractual Mix in Southern Agriculture Since the Civil War: Facts, Hypotheses, and Tests," Journal of Economic History, 42, 327-353.
Alston, Lee J., S.K. Datta, and J.B. Nugent, (1984) "Tenancy Choice in a Competitive Framework with transaction Costs," Journal of Political Economy, 92(6), 1121-1133.
Crocker, Keith J., and Scott E. Masten, (1988) "Mitigating Contractual Hazards: Unilateral Options and Contract Length," Rand Journal of economics, 19(3), 327.
Crocker, Keith J., and Scott E. Masten, (1991) "Pretia Ex Machina? Prices and Process in Long-Term Contracts," Journal of Law and economics, 34(1), 69.
Heide, J.B., and G. John, (1988) "Safeguarding Transaction -Specific Investments in Conventional Channels: The Role of Offsetting Investments," Journal of Marketing, 52(1), 20.
Hubbard, R.G., and R.J. Weiner, (1986) "Regulation and Long-Term Contracting in U.S. Natural Gas Markets," Journal of Industrial economics, 35(1), 71-79.
Hubbard, R.G., and R.J. Weiner, (1991) "Efficient Contracting and Market Power: Evidence from the U.S. Natural Gas Industry," Journal of Law and economics, 34(1), 25.
Joskow, Paul L., (1988) "Price Adjustments in Long-Term Contracts: The Case of Coal," Journal of Law and economics, 31(1), 47-83.
Joskow, Paul L., (1990) "The Performance of Long-Term Contracts: Further Evidence From Coal Contracts," Rand Journal of economics, 21, 251.
Lyon, T.P., and S.C. Hackett, (1993) "Bottlenecks and Governance Structures: Open Access and Long-Term Contracts in Natural Gas," Journal of Law, economics, and Organization, 9(2), 380-398.
Masten, Scott E., and Keith J. Crocker, (1985) "Efficient Adaptation in Long-Term Contracts: Take or Buy Provisions for Natural Gas," American Economic Review, 75, 1083-1097.
Mulherin, J. Harold, (1986) "Complexity in Long-term Contracts: An Analysis of Natural Gas Contract Provisions," Journal of Law, economics, and Organization, 2(1), 105-118.
Nygaard, A., and I. Myrtveit,
“Moral Hazard, Competition and Contract Design: Empirical Evidence from
Managerial, Franchised and Entrepreneurial Businesses in Norway,” Applied economics, Vol. 32, 2000,
349-356.
Palay, Thomas M., (1984) "Comparative Institutional economics: The Governance of Rail Freight Contracting," Journal of Legal Studies, 13, 265.
Palay, Thomas M., (1985) "Avoiding Regulatory Constraints: Contracting Safeguards and the Role of Informal Agreements," Journal of Law, economics, and Organization, 1(1), 155-176.
Pitman, Russell, (1991) "Specific Investments, Contracts, and Opportunism: The Evolution of Railroad Sidetrack Agreements," Journal of Law and economics, 34, 565-589.
Wiggins, Steven N., and Gary D. Libecap, (1985,) "Oil Field Utilization: Contractual Failure in the Presence of Imperfect Information," American Economic Review, 75, 638.
Wilson, James, (1980) "Adaptation to Uncertainty and Small Number Exchange: The New England Fresh Fish Market," Bell Journal of economics, 11, 495-503.
Garen, John, (1999) "The Theory of the Firm,
Independent Contractors, and Some Law and economics of Employment,"
working paper, Department of economics,
· AB: This paper considers use of employment contracts versus commercial contracts for the exchange of labor services. Those workers selling their services via the former contract are employees and those using the latter are independent contractors. Following the legal distinction between the two types of contracts, this is equivalent to modeling the right to control the work routine. The work routine is allowed to affect effort incentives as in Holmstrom and Milgrom (1994) and investment incentives as in Grossman and Hart (1986). Predictions of the effects of monitoring costs and the importance of investment on control of the work routine and use of independent contractors are derived. These predictions are tested and supported with data from the Current Population Survey augmented with occupational characteristics from the Dictionary of Occupational Titles.
Hallwood, C. Paul, (1990) "Measurement cost and the Organization of Exchange in the Oil Gathering Business," Journal of Institutional and Theoretical economics, 146(4), 576-593.
· SU: Hallwood presents a case study of the institutional arrangements governing contracts between the producer of oil and oil companies. Hallwood argues that because oil and the gathering of oil is a complex and multidimensional product, the buyers of oil are faced with high costs of searching, pricing, and evaluating oil offered by the many suppliers oil. Consequently, they adopted a modified first-price sealed bid auction in which "a seller states price only after receiving notification of a buyer's needs." This auction differs from non-invited sealed bid auctions in that bidders must be invited in order to bid and that price information is always kept secret by the purchasing companies. That is, bidders never know what the lowest bid was if they were not offered a contract. Hallwood argues that such an arrangement is preferred by oil companies because it lowers the cost of enforcing contractual performance, even at the risk of not inviting bidders who may offer the lowest price quotes.
· AB: transaction cost economics recognizes two alternative forms of governing production and exchange - market coordination and managerial control. When examining the contractual relationship between firms and workers, researchers generally consider employment to represent managerial control. This paper tests the assumption that employment is characterized by managerial control. Using evidence from an electronics producer, this paper tests whether factors affecting the employment status of workers, such as asset specificity, task interdependence, and high knowledge requirements, also affect the degree to which workers are managerially controlled. This research helps explain a number of market, organizational, and managerial innovations, such as employee self-management and the use of temporary workers.
Krueger, Alan, (1991) "Ownership, Agency, and Wages: An Examination of Franchising in the fast Food Industry," Quarterly Journal of economics, 106(1), 75-101.
· AB: This paper estimates the difference in compensation between company-owned and franchisee-owned fast food restaurants. The contrast is of interest because contractual arrangements give managers of company-owned outlets less of an incentive to monitor and supervise employees. Estimates based on two data sets suggest that employee compensation is slightly greater at company-owned outlets than at franchisee-owned outlets. The earnings gap is 9 percent for assistant and shift managers and 2 percent for full-time crew workers. Furthermore, the tenure-earnings profile is steeper at company-owned restaurants. These findings suggest that monitoring difficulties influence the timing and generosity of compensation.
Nalbantian, Haig R., and Andrew Schotter, (1997) "Productivity Under Group Incentives: An Experimental Study," American Economic Review, 87(3), 314-341.
· AB: This paper presents an experimental examination of a variety of group incentive programs. We investigate simple revenue sharing and more sophisticated, target-based systems such as profit sharing or productivity gainsharing, as well as tournament-based and monitoring schemes. Our results can be characterized by three facts: (1) history matters; how a group performs in one incentive scheme depends on its history together under the scheme that preceded it; (2) relative performance schemes outperform target-based schemes; and (3) monitoring can elicit high effort from workers, but the probability of monitoring must be high, therefore, costly.
Zenger, Todd R., (1994) "Explaining Organizational Diseconomies of Scale in R&D: Agency Problems and the Allocation of Engineering Talent, Ideas, and Effort by Firm Size," Management Science, 40(6), 708-729.
· AB: The comparative efficiency and success of small firms in R&D remains largely unexplained. This paper empirically examines scale diseconomies in offering employment contracts as explanation for diseconomies of scale in R&D. This paper argues that small firms more efficiently resolve the severe agency problems of hidden information and hidden behavior in R&D. Small firms more efficiently offer contracts that reward performance than large firms, and consequently, small firms attract and retain engineers with higher ability and skill. Further, small firms through these more performance-contingent contracts include higher levels of effort than large firms. The study tests and generally confirms these hypotheses using data collected from 912 current and former engineering employees of two large high-technology companies.
Armour, H., and Dav