Remarks on the Labor Economics Literature

The internal labor market literature has its roots in the industrial rela- tions-labor economics literature of the 1950’s and early 1960’s. The important contributions in this area include the work of Dunlop ( 1957; 1958), Kerr ( 1954), Livernash ( 1957), Meij ( 1963), Raimon ( 1953), and Ross ( 1958). This work, which

Technology: Conventional and Idiosyncratic Considerations

It is widely felt that technology has an important, if not fully determina- tive, influence on the employment relationship. I agree, but take exception with the usual view in several respects. First, for the reasons given in the preceding chapter, indivisibilities (of the usual kinds) are neither necessary nor sufficient for market contracting to

Individualistic Bargaining Models

Four types of individualistic contracting modes can be distinguished: (1) contract now for the specific performance of A in the future: (2) contract now for the delivery of x, contingent on event e, obtaining in the future: (3) wait until the future materializes and contract for the appropriate (specific) x at the time; and

The Efficiency Implications of Internal Labor Market Structures

The upshot is that none of the above contracting schemes has acceptable properties for tasks of the idiosyncratic variety. Contingent claims contracting (Meade, 1971, Chap. 10) fails principally because of bounded rationality. Spot market contracting (Alchian and Demetz. 1972, p. 777) is impaired by first- mover advantages and problems of opportunism. The authority relation

Understanding the employment relation: Concluding Remarks

Organizational failure and systems considerations appear repeatedly in the foregoing assessment of the properties of alternative contracting modes in relation to idiosyncratic tasks. These highlights are briefly recapitulated here, after which some qualifications are offered. 1. Application of the Organizational Failures Framework But for uncertainty, adaptive sequential decision-making problems would never be posed. Accordingly,

Prior Literature: A Transactional Interpretation

The discussion here does not pretend to be a comprehensive review of the prior literature that deals with vertical integration. It aspires merely to show that the vertical integration of technologically separable production stages ultimately turns on transactional considerations. Although this is sometimes suggested, it is rarely explicit in the literature; indeed, claims to

Static Markets

Consider an industry that produces a multicomponent product, assume that some  of  these  components  are  specialized (industry specific),  and  assume further that among these are components for which the economies of scale m production are large in relation to the market. The market, then will support only a few efficient-sized producers for certain components. A

Sales Contracts for Component Supply

Assume that the product in question is technically complex and that it needs to be supplied on a semicontinuous basis.52 Assume also, unless deterred by reason ot contractual disabilities, that periodic redesign and/ or eolume changes are made in response to changing environmental con- lions. Three alternative supply arrangements can be considered: a once-

Unified Ownership of Plant and Equipment: Simple Hierarchy Extended

Considering the above limitations of autonomous contracting, a shift from market to hierarchy warrants examination. Rather, however, than move immediately to a complex hierarchy, might the unified ownership of plant and equipment between the successive stages suffice? Simple hierarchy would be maintained; only the ownership of physical capital would be changed. Two variants of

Complex Hierarchy: The Employment Relation Extended

A chronic problem with which economic organization must contend is how to harness opportunism. For the reasons given in Chapter 4, indi-vidual workers acquire monopoly powers, in some degree, over jobs. Also, as the above discussion of the inside contracting system reveals, the same holds true for managers of functional departments. While individual interests

Forward Integration into Wholesaling

The preceding discussion has been concerned mainly with the vertical integration of successive production stages. But the institutional failures framework applies more generally. Franchising, for example, can usefully be studied in these terms. Forward integration into wholesaling is another illustration. Consider Holton’s discussion of the wholesaling issue. Holton (1968, pp. 151-153) contends that the

Intermediate product markets and vertical integration: Concluding Remarks

Vertical integration is favored in circumstances where small-numbers bargaining would otherwise obtain — whether this prevails from the very outset or because, once the initial contract is let, the parties to the transaction are effectively “locked in” at the recontracting interval — and where, in the face of uncertainty and on account of bounded

Interfirm Exchange: Some Qualifications

As previously noted (Chapter 2, Section 3.3), business reputation is a valuable resource that is not to be squandered, and firms sometimes develop experience-rating systems in which they pool information with respect to their contractual dealings with common suppliers or customers (Leff, 1970). To describe interfirm exchange in strictly antagonistic terms is accordingly too

Vertical integration: Possible or Purported Antisocial Consequences

Anticompetitive effects of two types are commonly attributed to inte- gration. price discrimination and barriers to entry. The argument has been compactly expressed in the following terms: “. . . vertical integration loses its innocence if there is an appreciable degree of market control at even one stage of the production process. It becomes

Vertical integration: Antitrust Implications

Except for the rather special case where a regulated firm has integrated backward into equipment supply, which needs to be assessed in the context of the regulatory milieu, vertical integration poses antitrust issues of two kinds: price may be adversely affected and the condition entry may be impaired. It needs, however, to be appreciated

Internalizing the Incremental Transaction: Some Disabilities

The concern here is less with progressive distortions that occur as the firm grows in size than it is with the types of distortions that are prospectively associated with any transaction which a firm of medium to large size and complexity chooses to discharge. The social psychology and organization theory literatures are the sources

Size Considerations of the firm

Attention is shifted here from a discussion of the disabilities of vertical integration to consider the general size limits to which the firm is subject. The issue can be put as follows: Holding the degree of vertical integration and organization form constant, are there simple size impediments that radial expansion of the firm eventually

Incentive Limits of the Employment Relation

As indicated in Chapter 4, the employment relation permits long-run incentives of a promotion ladder sort to be effectuated that are unavailable in market contracting. The firm consequently enjoys an advantage over the market in this respect. Firms, however, have very real limitations when it comes to the award of large bonus payments for

Limits of vertical integration and firm size: Concluding Remarks

Internal organization ought to be regarded as a syndrome of charac- teristics: distinctive strengths and distinctive weaknesses, in a comparative institutional sense, appear nonseparably — albeit in variable proportions — as a package. Although the existence of market failure constitutes a pre- sumptive basis for internalizing transactions, the “defects” associated with market exchange may

The Unitary Form Enterprise

1. Structural Attributes As Chandler indicates (1966, Chap. 1), the late 1800’s witnessed the emergence of the large, single-product, multifunctioned enterprise — in steel, meatpacking, tobacco, oil, and so forth. These firms were organized along functional lines and will be referred to as unitary form (or U-form) enterprises. The principal operating units in the