Recall that two branches of transaction cost economics are distinguished in the cognitive map of contract set out in Chapter 2: a governance branch, where the concern is with adaptive, sequential decision-making, and a measurement branch, where the problems are attributable to information impact- edness. To be sure, the two conditions are commonly joined (Alchian, 1984, p. 39). My discussion*’ôî’thT’(7rgânî2^üh’1oF intermediate product markets deals principally with the governance side. If measurement problems exist, they are assumed to vary directly with asset specificity.
My discussion of labor organization and of corporate organizatio this chapter and those following makes greater provision for measure aspects. As between the two, the governance side continues to be the main source of refutable implications. But express attention to measurement is more important and even essential.
1. The Fundamental Transformation
The Radical account of pinmaking and of work organization makes no provision for asset specificity and its organizational ramifications. Even supposing that the machines used to make pins were interchangeable, one factory to another, so that a condition of physical asset specificity was absent, the equipment in a pin factory had site specificity features (it was not “on wheels”). It is furthermore plausible that the workers developed firm-specific knowledge and skills.5 Given nontrivial asset specificity in either site or human asset respects, successive stations would thereafter operate in an ex post bilateral trading relationship with each other. Despite what may have been a large numbers bidding condition at the outset, if the fundamental transformation thereafter took effect, then the eventual configuration would be one for which a specialized governance structure was needed.
To be sure, radical economists are not uniquely culpable in their failure to acknowledge that condition and.to recognize its organizational importance. But they were plainly in a better position to deal with such matters than were economists of orthodox persuasions. Marglin and others had already made the shift to a more microanalytic level of analysis in their efforts to assess the organization of work. Implicitly, the transaction had become the basic unit of analysis. The next step was to submit alternative feasible organizing structures to comparative institutional analysis. They pulled up short of that, however, and were content instead to assert that nonhierarchical modes of organization had good if not superior efficiency properties.
The measurement difficulties of principal interest in this chapter and those following are attributable to a condition of information impactedness. One of the parties to a transaction has more complete knowledge than does the other, which asymmetry condition is costly to overcome and gives rise to a trading hazard. Sometimes markets fail for that reason (Akerlof, 1970). But that is not the only, or even the main, possibility. Organizational responses often occur that serve to mitigate the hazard.
Two responses can be distinguished: an incentive response and a metering response. The incentive response relaxes the connection between rewards and an imperfectly observed indicator of performance, thereby weakening the incentive for deceit.^or example, workers on pjece rate have stronger incentives to shade quality than do hourly workers. The metering response may entail redesigning the product or reorganizing the task. The object in either case is to display true attributes more accurately.
Although radical economists regard shirking, embezzlement, and quality shading as income redistribution effects, the fact is that numerous resource allocation consequences “ehsûëTTFbr–one thing, investments in products and technologies that are more subject to such losses will be relatively disfavored. Second, the black markets on which embezzled product is traded are inefficient. Third, efforts to police against those losses involve the use of real resources. Further distortions occur because systems that are more subject to shirking and embezzlement will induce wage adjustments that penalize workers who are less given to such deceits. (It is not an accident that those with few scruples predominate in some occupations. Those with more scruples are simply non viable.)
Source: Williamson Oliver E. (1998), The Economic Institutions of Capitalism, Free Press; Illustrated edition.