The Governance of Contractual Relations: The Distribution of Transactions

The study of contractual relations plainly involves more than an examination of discrete markets on the one hand and hierarchical organization on the other. As Llewellyn observed in 1931, the exchange spectrum runs the full gamut from pure market to hierarchy and includes complex “future deals” located between market and hierarchy extremes (1931, p. 727). Similarly, George Richardson remarks that “what confronts us is a continuum passing from transactions, such as those on organized commodity markets, where the cooperation element is minimal, through intermediate areas in which there are linkages of traditional connection and good will, and finally to those complex and interlocking clusters, groups and alliances which represent cooperation fully and formally developed” (1972, p. 887). Both Richardson’s examples and those more recently developed and discussed by Arthur Stinchcombe (1983) demonstrate that activity in the middle range is extensive. Stewart Macaulay’s empirical examination of commercial contracting practices (1963) confirms this.

Suppose that transactions were to be arrayed in terms of the degree to which parties to the trade maintained autonomy. Discrete transactions would thus be located at the one extreme, highly centralized, hierarchical transactions would be at the other, and hybrid transactions (franchising, joint ventures, other forms of nonstandard contracting) would be located in between. What would the resulting distribution of transactions look like?

The three leading candidates are (1 ) the bimodal distribution, where most transactions cluster at one or the other extreme, (2) the normal distribution, whence the extremes are rare and most transactions display an intermediate degree of interdependence, and (3) the uniform transaction. Whereas I was earlier of the view that transactions of the middle kind were very difficult to organize and hence were unstable, on which account the bimodal distribution was more accurately descriptive (Williamson, 1975), 1 am now persuaded that transactions in the middle range are much more common. (Such transactions ave, moreover, been the object of increasing attention in the economic, legal, and organizations literatures.) But inasmuch as standardized commodity transactions are numerous and as administrative organization is similarly widespread, the tails of the distribution are thick. By a process of elimination, the uniform distribution appears most nearly to correspond with the world of contract as it is. Whatever the empirical realities, greater attention to transactions of the middle range will help to illuminate an understanding of complex economic organization. If such transactions flee to the extremes, what are the reasons? If such transactions can be stabilized, what are the governance processes?

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

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