Some Directions for Future Research

1. Theoretical A leading theoretical need is for additional work on the properties of hierarchy. The mathematical theory of hierarchical forms is not, unfortu-nately, well-developed (Varaiya, 1972, p. 497). Simon’s (1962) interdisciplinary review of the evolution of hierarchy and his heuristic discussion of its advantages provides useful background for such an effort.189 The economic

The Economic Institutions of Capitalism: Antecedents from the 1930s

1. Economics A significant contribution to the study of economic organization that preceded the 1930s was Frank Knight’s (1965) classic treatment of Risk, Uncertainty, and Profit in 1922. Knight plainly anticipated Percy Bridgeman’s counsel to social, scientists that “the principal problem in understanding the actions of men is to understand how they think—how their

The Economic Institutions of Capitalism: The Next Thirty Years

Those were auspicious beginnings. A sound basis for further advances had plainly been laid. The comparative institutional analysis of economic organi- zation did not, however, flourish. Attention was concentrated elsewhere. The prevailing orientation toward economic organization in the thirty- year hiatus between 1940 and 1970 was that technological features of firm and market organization

The Economic Institutions of Capitalism: An Overview

The book successively sets out the rudiments of transaction cost economics, applies the basic arguments to a series of economic institutions over which there has been widespread disagreement or puzzlement, and develops public policy ramifications. Chapter 1 provides an overview of the transaction cost economics ap- proach to the study of economic organization. The

Transaction Costs

1. Frictionlessness Kenneth Arrow has defined transaction costs as the “costs of running the economic system” (1969, p. 48). Such costs are to be distinguished from production costs, which is the cost category with which neoclassical analysis has been preoccupied. Transaction costs are the economic equivalent of friction in physical systems. The manifold successes of

Transaction Cost Economics: A Cognitive Map of Contract

The field of specialization with which transaction cost economics is most closely associated is industrial organization. A number of the leading ap- proaches to the study of industrial organization and the relation that transaction cost economics bears to.them are examined here. Industrial organization examines contract in terms of the purposes served. What are the

Transaction Cost Economics: The World of Contract

The world of contract is variously described as one of (1) planning, (2) promise, (3) competition, and (4) governance (or private ordering). Which of these descriptions is most applicable depends on the behavioral assumptions that pertain to an exchange and on the economic attributes of the good or service in question. As developed more

Transaction Cost Economics: A Simple Contracting Schema

Assume that a good or service can be supplied by either of two alternative technologies. One is a general purpose technology, the other a special purpose technology. The special purpose technology requires greater investment in transaction-specific durable assets and is more efficient for servicing steady- state demands. Using k as a measure of transaction-specific

Economic Organization of the Company Tow

The company town is mainly regarded as a painful reminder of labor abuses associated with an earlier era. Surely there is nothing favorable, much less redeeming, that can be said about such a condition. Still, company towns were the exception rather than the rule The question, moreover, needs to be asked, why would anyone

Transaction Cost Economics: Applications

The applications of transaction cost economics sketched here are developed more extensively in later chapters. The object is merely to motivate the proposition that transaction cost economics makes useful contact with many of the issues of central interest to applied microeconomics. 1. Vertical Market Restrictions  Whereas it was once common to approach customer and

Transaction Cost Economics: Concluding Remarks

Transaction cost economics relies on and develops the following propositions:  The transaction is the basic unit of analysis. Any problem that can be posed directly or indirectly as a contracting problem is usefully investigated in transaction cost economizing terms. Transaction cost economies are realized by assigning transactions (which differ in their attributes) to governance

Contractual Man: Behavioral Assumptions

Many economists treat behavioral assumptions’ as a matter of convenience. This reflects a widely held opinion that the realism of the assumptions is unimportant and that the fruitfulness of a theory turns on its implications (Friedman, 1953).2 As noted earlier, however, Bridgeman urges that an understanding of the actions of men requires more self-conscious

Contractual Man: Dimensions

Transaction cost economics maintains that there are rational economic reasons for organizing some transactions one way and other transactions another. But which go where and for what reason? A predictive theory of economic organi- zation requires that the factors responsible for differences among transactions be identified and explicated. The principal dimensions with respect to

Contractual Man: The Fundamental Transformation

Economists of all persuasions recognize that the terms upon which an initial bargain will be struck depend on whether noncollusive bids can be elicited from more than one qualified supplier. Monopolistic terms will obtain if there is only a single highly qualified supplier, while competitive terms will result if there are many. Transaction cost

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

The Governance of Contractual Relations: Contracting Traditions

There is widespread agreement that the discrete transaction paradigm— “sharp in by clear agreement; sharp out by clear performance (Macneil, 1974, p. 738)—has served both law and economics well. But there is also increasing awareness that many contractual relations are not of this well- defined kind. A deeper understanding of the nature of contract

The Governance of Contractual Relations: Efficient Governance

As discussed above, the principal dimensions for describing transactions are asset specificity, uncertainty, and frequency. It will facilitate the argument in this section to assume that uncertainty is present in sufficient degree to pose an adaptive, sequential decision requirement and to focus on asset specificity and frequency. Three frequency classes—one-time, occasional, and recurrent—and three

The Governance of Contractual Relations: Uncertainty

The proposed match of governance structures with transactions considers only two of the three dimensions for describing transactions: asset specificity and frequency. The third dimension, uncertainty, is assumed to be present in sufficient degree to pose an adaptive, sequential decision problem. The occasion to make successive adaptations arises because of the impossibility (or costliness)

The Governance of Contractual Relations: Measurement

The cognitive map of contract set out in Figure 1 -1 (Chapter 1) distinguishes between two branches of transaction cost economics: the governance branch and the measurement branch. The former is concerned mainly with organizing transactions in such a way as to facilitate efficient adaptations. The latter is concerned with the ways by which

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.