The organizational failures framework: Information Impactedness

Information impactedness is a derivative condition that arises mainly because of uncertainty and opportunism, though bounded rationality is involved as well. It exists when true underlying circumstances relevant to the transaction, or related set of transactions, are known to one or more parties but cannot be costlessly discerned by or displayed for others. It

The organizational failures framework: Atmosphere

1. General The power of economics, in relation to the other social sciences, is to be traced in no small part to its unremitting emphasis on net benefit analysis. Care must be exercised, however, lest problems be construed too narrowly. This will occur if net benefits are calculated in transaction-specific terms, when in fact

Peer Group Associations

In order to avoid imputing benefits to hierarchy that can be had, in some degree, by simple nonhierarchical associations of workers, it will be useful to begin with an examination of worker peer groups. These groups involve collective and usually cooperative activity, provide for some type of other-than-marginal productivity and income-sharing arrangement, but do

Peer Group Limitations

That peer groups may have attractive properties in relation to the market for at least some individuals should be apparent from the above. But they also experience very real limitations. In comparison with both market and hierarchical organization, peer groups, being loose metering structures, are vulnerable to free rider abuses. In addition, collective decision-making

Simple Hierarchy of organization

That peer groups sometimes offer advantages in relation to autonomous contracting is apparent from the discussion in Section 1. But as Section 2 makes clear, peer groups also face limitations in both opportunism and bounded rationality respects. The restricted range of control techniques to which peer groups have access, in seeking to mitigate these

Involvement in organization

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

Peer groups and simple hierarchies: Concluding Remarks

The simple (or single stage) hierarchies that have been discussed in this chapter will serve as the principal building blocks for the assembly of a complex (multistage) hierarchy in subsequent chapters. As might be anti- cipated, there are striking parallels between the reasons for workers to be joined in simple hierarchies and the decision

Remarks on the Labor Economics Literature

The internal labor market literature has its roots in the industrial rela- tions-labor economics literature of the 1950’s and early 1960’s. The important contributions in this area include the work of Dunlop ( 1957; 1958), Kerr ( 1954), Livernash ( 1957), Meij ( 1963), Raimon ( 1953), and Ross ( 1958). This work, which

Technology: Conventional and Idiosyncratic Considerations

It is widely felt that technology has an important, if not fully determina- tive, influence on the employment relationship. I agree, but take exception with the usual view in several respects. First, for the reasons given in the preceding chapter, indivisibilities (of the usual kinds) are neither necessary nor sufficient for market contracting to

Individualistic Bargaining Models

Four types of individualistic contracting modes can be distinguished: (1) contract now for the specific performance of A in the future: (2) contract now for the delivery of x, contingent on event e, obtaining in the future: (3) wait until the future materializes and contract for the appropriate (specific) x at the time; and

The Efficiency Implications of Internal Labor Market Structures

The upshot is that none of the above contracting schemes has acceptable properties for tasks of the idiosyncratic variety. Contingent claims contracting (Meade, 1971, Chap. 10) fails principally because of bounded rationality. Spot market contracting (Alchian and Demetz. 1972, p. 777) is impaired by first- mover advantages and problems of opportunism. The authority relation

Understanding the employment relation: Concluding Remarks

Organizational failure and systems considerations appear repeatedly in the foregoing assessment of the properties of alternative contracting modes in relation to idiosyncratic tasks. These highlights are briefly recapitulated here, after which some qualifications are offered. 1. Application of the Organizational Failures Framework  But for uncertainty, adaptive sequential decision-making problems would never be posed. Accordingly,

Prior Literature: A Transactional Interpretation

The discussion here does not pretend to be a comprehensive review of the prior literature that deals with vertical integration. It aspires merely to show that the vertical integration of technologically separable production stages ultimately turns on transactional considerations. Although this is sometimes suggested, it is rarely explicit in the literature; indeed, claims to

Static Markets

Consider an industry that produces a multicomponent product, assume that some  of  these  components  are specialized (industry specific),  and  assum further that among these are components for which the economies of scale m production are large in relation to the market. The market, then will support only a few efficient-sized producers for certain components.

Sales Contracts for Component Supply

Assume that the product in question is technically complex and that it needs to be supplied on a semicontinuous basis. Assume also, unless deterred by reason ot contractual disabilities, that periodic redesign and/ or eolume changes are made in response to changing environmental con- lions. Three alternative supply arrangements can be considered: a once-

Unified Ownership of Plant and Equipment: Simple Hierarchy Extended

Considering the above limitations of autonomous contracting, a shift from market to hierarchy warrants examination. Rather, however, than move immediately to a complex hierarchy, might the unified ownership of plant and equipment between the successive stages suffice? Simple hierarchy would be maintained; only the ownership of physical capital would be changed. Two variants of

Complex Hierarchy: The Employment Relation Extended

A chronic problem with which economic organization must contend is how to harness opportunism. For the reasons given in Chapter 4, indi-vidual workers acquire monopoly powers, in some degree, over jobs. Also, as the above discussion of the inside contracting system reveals, the same holds true for managers of functional departments. While individual interests

Forward Integration into Wholesaling

The preceding discussion has been concerned mainly with the vertical integration of successive production stages. But the institutional failures framework applies more generally. Franchising, for example, can usefully be studied in these terms. Forward integration into wholesaling is another illustration. Consider Holton’s discussion of the wholesaling issue. Holton (1968, pp. 151-153) contends that the

Intermediate product markets and vertical integration: Concluding Remarks

Vertical integration is favored in circumstances where small-numbers bargaining would otherwise obtain — whether this prevails from the very outset or because, once the initial contract is let, the parties to the transaction are effectively “locked in” at the recontracting interval — and where, in the face of uncertainty and on account of bounded

Interfirm Exchange: Some Qualifications

As previously noted (Chapter 2, Section 3.3), business reputation is a valuable resource that is not to be squandered, and firms sometimes develop experience-rating systems in which they pool information with respect to their contractual dealings with common suppliers or customers (Leff, 1970). To describe interfirm exchange in strictly antagonistic terms is accordingly too