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 rationality resources in both information flow and decision-making respects.) Simple hierarchy also permits auditing and experience-rating effectively to be brought to bear, thereby mitigating the free-rider disabilities to which peer groups are subject. It furthermore offers risk-bearing advantages.
What then prevents the peer group from being fully displaced by simple hierarchy? The main reason,14 I submit, is that peer groups afford valued involvement relations that are upset, in some degree, by hierarchy. Not only is transparent inequality of rank considered objectionable by some individuals, but auditing and experience-rating may offend their sense of individual and collective well-being. On these accounts, the productivity loss which the peer group form of organization entails is acceptable to some groups — provided, at least, that survival is not threatened.
The more general questions to be addressed, however, are not non- metering (peer group) or full-metering (an exacting quid pro quo work relation in which the marginal net benefits of metering, in a transaction- specific sense, are set equal to zero). Rather, given that individuals differ with respect to their preferences for metering, the issues are the following:
- to supply the requisite mixture of structures, which vary in the intensity of metering, thereby to allow individuals to match themselves to organi- zations in accordance with their involvement-productivity tradeoffs;16 and
- to recognize the possibility of attitudinal interaction effects among sets of Where such interactions exist, a highly transaction-specific approach to metering can be dysfunctional.
Whereas technological interaction effects play a prominant role in economics, attitudinal interactions are commonly neglected. Alchian and Demsetz’ discussion of the metering problem of internal organization by reference to faculty appropriation of “office telephones, paper and mail for personal uses beyond strict university productivity” (Alchian and Demsetz, 1972, p. 780) is illustrative. They contend that if these and related practices (what they refer to as “turpitudinal peccadilloes”) could be costlessly detected, on a faculty-specific basis, such practices would be eliminated, pecuniary rewards could be increased correspondingly, and all could achieve a more preferred position (1972, p. 781). But is this really so? Does it assume, implicitly, that metering intensively, where this is easy (costless), has no effect on the attitudes of workers with regard to transactions that are costly to meter?
The distinction between perfunctory and consúmate cooperation, which is developed more fully in the following chapter, is relevant in this connection. It seems at least plausible that extending metering with respect to such peccadilloes as appear to be of concern to Alchian and Demsetz until the costs and benefits ( expressed in transaction-specific terms — that is, without regard for spillover) are equalized at the margin will be regarded as picayune and will elicit resentment. Cooperative attitudes will be impaired with the result that tasks such as teaching effectiveness — which can be metered only with difficulty, because information is deeply impacted, butforwhichconsummatecooperation is important — will be discharged in a more perfunctory way. A less intensive effort to extinguish peccadilloes would thus yield a system gain. The neglect of such interaction effects is encouraged by an insensitivity to atmosphere.29 The inherent metering limitations which peer groups experience make them less susceptible than hierarchies to such neglect.
Source: Williamson Oliver E. (1975), Markets and hierarchies: Analysis and antitrust implications, A Study in the Economics of Internal Organization, The Free Press.