Turing machines), and somewhat more on measures of complexity of
strategies for supporting supergame equilibria. But these approaches have
not, I think, led us in directions that will help with the problems encountered
in this chapter, and I will not, in consequence, bother with references.
Unforeseen contingencies have not otherwise arisen in the formal literature
to my knowledge, and so on that subject, four years after it was originally
promised, I can do nothing more than at long last offer for the reader's
enjoyment Kreps ( 1988).
In writing this chapter, I had tremendous difficulties coming up with a term for
what it is that textbook economics and the Porter approach to strategy does not
analyze. I will use organizational efficiency and effectiveness and words of that ilk,
but I confess much unhappiness with them.
The notion of a hierarchical transaction and its particular relevance to employment relationships is quite old--going back at least to
Simon ( 1951).
The role of reputation in hierarchical transactions also appears in
Simon ( 1951).
It might run thus: concentrated ownership of capital can be, as they show,
efficient. Capital ownership by an individual might subject the individual to too
much risk. Hence, for purposes of risk sharing we invent the limited stock
The argument's flavor is easiest to suggest if we assume that the game will run
precisely one hundred million rounds. In this case, roughly, the argument runs as
follows: A, with many rounds to go, will want to test B to see if B will honor trust.
At worst A loses $5 by doing so, and there is a one-in-one-thousand chance that A
will make at least $10 in each of the many rounds left to go. But then what will B
do when A tries him or her out? Even if B is not a moral person, B will honor that
trust: to abuse it would reveal B's true character to A and would mean obtaining
nothing in all subsequent rounds; honoring trust will cause A to take another
chance for a long time to come worth $10 each time.
The reader desiring a more exact analysis of the issues discussed here may wish to
refer at this point to the Appendix near the end of the chapter, where a simple
example is presented.
Well, that is a bit of an overstatement. One must trade off unambiguity and the
overall efficiency of the arrangement. In our earlier example of easy and hard
problems and problems that do or do not require calculus, applying the calculus
rule might be completely unambiguous, but as we make the necessity of calculus
less and less predicative on the difficulty of the job, we lower the surplus derived
from basing payment on the necessity of calculus. We could lower the predicative
power of calculus to just the point where the arrangement still lives (test (ii) is just
Questia, a part of Gale, Cengage Learning. www.questia.com
Book title: Firms, Organizations and Contracts:A Reader in Industrial Organization.
Contributors: Peter J. Buckley - Editor, Jonathan Michie - Editor.
Publisher: Oxford University Press.
Place of publication: Oxford.
Publication year: 1996.
Page number: 273.
This material is protected by copyright and, with the exception of fair use, may
not be further copied, distributed or transmitted in any form or by any means.