Transaction Cost Economics

In transaction cost economics and related disciplines, a transaction cost is a cost incurred in making an economic exchange. A number of different kinds of transaction costs exist. Search and information costs are costs such as those incurred in determining that the required good is available on the market, who has the lowest price,

Evolutionary Processes of Industry

Although initial structure, structural potential, and particular firms’ investment decisions will be industry-specific, we can general-ize about what are the important evolutionary processes. There are some predictable (and interacting) dynamic processes that occur in every industry in one form or another, though their speed and direc-tion will differ from industry to industry: long-run changes

Toward a new institutional economics: Some Antecedents

The materials in this section are in no sense a survey. They merely indi­cate an early concern among some members of the profession of the types of institutional issues that I deal with in this treatise. With the exception of the market failure literature, which is examined briefly in Section 1.4, there is little

A Preliminary Statement of the Organizational Failures Framework

Although I shall defer a more complete statement of the organizational failures framework until Chapter 2 (indeed, some of the elements that appear in it are not even identified here), a sketch of the basic approach, set out early, will not only provide an overview of what will follow but also permit some immediate

Toward a new institutional economics: Three Illustrations

Whether the proposed approach leads to a better understanding of or to implications different from those found in received microtheory can best be established by addressing it to particular economic phenomena. Three are examined here: price discrimination, the insurance problem, and Stigler’s life cycle treatment of vertical integration. Although the first of these does

The organizational failures framework: Bounded Rationality and Uncertainty/Complexity

1. General Bounded rationality refers to human behavior that is “intendedly rational, but only limitedly so” (Simon, 1961, p. xxiv). Although it is widely appreciated that human decision makers are not lightning calculators, and occasionally this fact is explictly taken into account in abstract models of market processes ( Radner. 1968), the implications for

The organizational failures framework: Opportunism and Small Numbers

1. General Opportunism extends the conventional assumption that economic agents are guided by considerations of self-interest to make allowance for st™ eg,c behavior. This involves self-interest seeking with guile and has profound implications for choosing between alternative contractual relationships. Such strategic interaction has been discussed in other contexts by other writers; Schelling’s (1960) and

The organizational failures framework: Information Impactedness

Information impactedness is a derivative condition that arises mainly because of uncertainty and opportunism, though bounded rationality is involved as well. It exists when true underlying circumstances relevant to the transaction, or related set of transactions, are known to one or more parties but cannot be costlessly discerned by or displayed for others. It

The organizational failures framework: Atmosphere

1. General The power of economics, in relation to the other social sciences, is to be traced in no small part to its unremitting emphasis on net benefit analysis. Care must be exercised, however, lest problems be construed too narrowly. This will occur if net benefits are calculated in transaction-specific terms, when in fact

The organizational failures framework: Summary Remarks

At the risk of oversimplification, the argument of the preceding sections of this chapter can be summarized by the schematic in Figure 3. The main pairings are shown by the heavy double-headed arrows which associate bounded rationality with uncertainty/complexity on the one hand and op- portunism with a small-numbers exchange relations on the other.

Peer Group Associations

In order to avoid imputing benefits to hierarchy that can be had, in some degree, by simple nonhierarchical associations of workers, it will be useful to begin with an examination of worker peer groups. These groups involve collective and usually cooperative activity, provide for some type of other-than-marginal productivity and income-sharing arrangement, but do

Peer Group Limitations

That peer groups may have attractive properties in relation to the market for at least some individuals should be apparent from the above. But they also experience very real limitations. In comparison with both market and hierarchical organization, peer groups, being loose metering structures, are vulnerable to free rider abuses. In addition, collective decision-making

Simple Hierarchy of organization

That peer groups sometimes offer advantages in relation to autonomous contracting is apparent from the discussion in Section 1. But as Section 2 makes clear, peer groups also face limitations in both opportunism and bounded rationality respects. The restricted range of control techniques to which peer groups have access, in seeking to mitigate these

Involvement in organization

It would appear, from the above arguments, that simple hierarchy can do everything the peer group can do and more. It can contend better with indivisibilities of both physical and informational types, since it has superior bounded rationality properties. (Not that bounded rationality vanishes; rather, simple hierarchy economizes on the use of scarce bounded

Peer groups and simple hierarchies: Concluding Remarks

The simple (or single stage) hierarchies that have been discussed in this chapter will serve as the principal building blocks for the assembly of a complex (multistage) hierarchy in subsequent chapters. As might be anti- cipated, there are striking parallels between the reasons for workers to be joined in simple hierarchies and the decision

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,