Firms, Organizations and Contracts: A Reader in Industrial Organization

By Peter J. Buckley; Jonathan Michie | Go to book overview
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From this perspective, the focus strategy becomes a strategy of reducing the range of contingencies with which the implicit contract must deal, in order to deal better-less ambiguously--with those that are met.

5. In this chapter we have kept to cases in which one party A is short-lived and a second B is either long-lived or has vested interests in the reputation of a long-lived entity. Accordingly, any hierarchical transacting places hierarchical authority in B. This is but one arrangement that could be found. A second, quite prevalent arrangement is where As as well have vested interests in a second long-lived entity, and At deals with Bt through their two (respective) organizations. Examples are two corporations with an enduring relationship, and a labor union and a corporation. In such cases, transactions would not need to be hierarchical--rather, it would seem that the two parties could deal on equal terms. We would expect to see more transactions in which neither dictates what is done in the face of an unforeseen contingency, but where the two deal with these contingencies as they arise. (More hierarchical authority would rest with one of the parties, ceteris paribus, the easier it was to observe that the decisions of that party live up to an implicit contract.)

Since the range of possible implicit contracts is thus increased, one expects an increase in efficiency with such bilateral long lived relationships. It would also seem likely that, when compared with the situation in which only the Bs are organized, the case of bilateral organization would increase the share of surplus garnered by the As, at least in cases where Bs in the transaction are not perfectly competitive. In the case of labor unions as the A organization and firms as the B, these conclusions are borne out empirically (see Brown and Medoff 1978).


8. Concluding Remarks and Questions

I hope that this chapter has been able to communicate to a wide range of social scientists answers to the questions: How might an economist explain the role of corporate culture? How does that explanation tie in to extant economic theory? What pieces of theory are missing, and what might they look like when put in place? As I imagine is the case with most disciplines, economists tend to be intellectual imperialists, trying to render everything into their own terms of reference. This, then, has been an exercise in imperialism.

I have little doubt that this is a useful exercise for economic theorists. Until

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