Firms, Organizations and Contracts: A Reader in Industrial Organization

By Peter J. Buckley; Jonathan Michie | Go to book overview

observable ex post--A's randomization to determine whether to enforce punishment and B's randomization to determine whether to defect from strict adherence.) I conjecture as well that a very general proposition of this sort can be derived, but this will have to await another essay.


Postscript--1988

In the four or so years that have passed since I wrote "'Corporate Culture'", there has been a fair amount of energy devoted to some of the themes surveyed there. Even given the normal publication lag, it would be unfortunate not to pay some attention to those themes. At the same time, it is amusing to reread the last line of the introduction: 'readers will see that the final steps, while not accomplished, are not excessively difficult to traverse.' As some of those final steps are barely closer to fulfillment now than then, either I misestimated their difficulty or their inherent interest. I think the former is more likely to be true.

The one point at which, in rereading the chapter, I winced so hard that I felt compelled to signal that I would say something more is where I criticized Williamson for having little to say about the relative advantages and disadvantages of internal organization. (Hereafter, I will use his term and call it unified governance.) I would have profited enormously in writing this chapter from a close reading of Williamson ( 1985) and, especially in this instance, in reading chapter 6, on the inefficiencies of unified governance. To recast slightly what Williamson has to say there, when one moves from market governance to unified governance, one trades one set of inefficiencies for another, as the nature of what is exchanged changes. In market governance, a decision maker deals with others only to purchase the outputs derived from their labors. When we move to unified governance, the single decision maker can command the use of all the capital, but now that person must employ the labor services of those he or she earlier dealt with only for the output of their labor. The high-powered market-based incentives for labor are replaced by lower-powered internal incentives. Why are market-based incentives more high-powered? Williamson gives a number of specific reasons, many of which come down to the fact that it is hard in some cases to preserve ex post in internal organization the ex ante incentives that one has. To say more will take us too deeply into a whole new subject, except to say that Williamson ( 1985) answers my initial criticism rather substantially. Moreover, Williamson's more verbal theorizing on this point has been met by a number of more

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