Opportunism: A Digression

The behavioral assumption that human agents are given to opportunism elicits a variety of reactions, ranging from abhorrence through easy acceptance to an insistence that this is yet another case where there is nothing new under the sun. There are even those who regard opportunism as irrelevant.

Those who abhor the use of opportunism regard it as an unduly jaundiced view of human nature and/or are distressed with the theory of economic organization that it supports. I can appreciate both concerns. Note with respect to the first that I do not insist that every individual is continuously or even largely given to opportunism. To the contrary, I merely assume that some individuals are opportunistic some of the time and that differential trustworthiness is rarely transparent ex ante. As a consequence, ex ante screening efforts are made and ex post safeguards are created. Otherwise, those who are least principled (most opportunistic) will be able to exploit egregiously those who are more principled. (Even, moreover, in dealings among those who are known to be opportunistic, there are benefits in mutual restraint, as reflected in the aphorism that there is honor among thieves, although admittedly it invites a more complex interpretation than can be attempted here.)

One of the implications of opportunism is that “ideal” cooperative modes of economic organization, by which 1 mean those where trust and good intentions are generously imputed to the membership, are very fragile. Such organizations are easily invaded and exploited by agents who do not possess those qualities. “High-minded” organizational forms—those which presume trustworthiness, hence are based on nonopportunistic principles—are thus rendered nonviable by the intrusion of unscreened and unpenalized opportunists. Accordingly, those who would have cooperatives succeed must, of necessity, make organizational concessions to the debilitating effects of opportunism. Viable cooperatives will attempt to screen against, socially recondition, and otherwise penalize opportunistic invaders.

At the other extreme are those who maintain that opportunism has always been the operative behavioral assumption. Express reference to “self-interest- seeking with guile’ is thus merely a gloss. My response comes in two parts. First, even if true, there are advantages in being more rather than less explicit about what we mean, especially in dealing with those who may be unfamiliar with oral traditions. But second, and more to the point, I seriously dispute that opportunism has been the operative behavioral assumption. Public goods, insurance, and oligopoly aside, there was little or no provision for opportunism in most textual and other treatments of economic organization as recently as 1970. Peter Diamond’s remarks bn the prevailing orientation toward self-interest seeking in the postwar era are pertinent: standard “economic models [treat] individuals as playing a game with fixed rules which they obey. They do not buy more than they know they can pay for, they do not embezzle funds, they do not rob banks” (1971, p. 31). Simple self-interestseeking, rather than opportunism, was plainly the ruling view Thus circa 1970,

  1. Vertical integration was not viewed as a problem of contracting but one of applied price theory and/or technology.
  2. Labor union organization was treated almost entirely as a matter of monopoly, there being little or no reference to efficient governance and the attenuation of opportunism.
  3. The efficiency benefits of nonstandard forms of contracting were almost wholly disregarded in favor of monopoly explanations for those conditions.
  4. Regulatory solutions in which contracting complications attributable to opportunism were dismissed or suppressed were prescribed.
  5. The study of contract doctrine relied (and still relies) almost entirely on assumptions of differential risk aversion, concerns over the hazards of opportunism having been suppressed.
  6. Firms were regarded as production functions rather than governance structures.
  7. More generally, the importance of process and of the institutions of governance to the study of economic organization were undervalued.

Indeed, if an appreciation for opportunism was widespread, what explains the dramatic impact of George Akerlof’s treatment of the “lemons problem” in 1970? Or what explains Ronald Coase’s uncontested claim that Industrial Organization, circa 1970, was a study in “applied price theory,” whence neoclassical monopoly rather than efficient contracting considerations were predominant?

Consider finally the view that opportunism is irrelevant: All that matters is bounded rationality. That result is reached by observing that if unbounded rationality (of the most comprehensive kind, in which even all forms of private information were annihilated) were to obtain then comprehensive long-term contracting would be feasible and all of the problems purportedly due to “opportunism at contract renewal would be entirely eliminated at no cost. [Accordingly, the] reigning-comparative-efficiency explanation for internal organization [opportunism] ultimately reduces to an explanation from imperfect structural knowledge [bounded rationality]” (Langlois, 1984, P- 33).

I agree that opportunism is of no account in the face of unbounded rationality. But I also insist that bounded rationality notwithstanding, contracting would be ubiquitous in the face of nonopportunism—that is, if simple self- interest-seeking is assumed. Thus although simple self-interest-seeking assures that all original bargaining advantages (e.g. monopoly ownership of resources) will be fully realized, it also permits ex post contracting problems to be annihilated by recourse to a “general clause” whereby parties to a contract promise to disclose all relevant information candidly and to behave in a cooperative fashion during contract execution and at contract renewal intervals.

The general clause mechanics are discussed elsewhere (Williamson, 1975, pp. 27, 91-93). Suffice it to observe here that four cases must be  distinguished and that contracting problems vanish for three of them. These are (1) unbounded rationality/nonopportunism—a condition of contractual utopia; (2) unbounded rationality/opportunism—a case where contracts can be made to work well by recourse to comprehensive contracting; (3) bounded rationality/nonopportunism—where contracting works well because of general clause protection against the hazards of contractual incompleteness; and (4) bounded rationality/opportunism—which 1 maintain accords with reality and is where all of the difficult contracting issues reside. The entries that appear in the following four-way classification of contract are offered as an overview.

Source: Williamson Oliver E. (1998), The Economic Institutions of Capitalism, Free Press; Illustrated edition.

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