Comparative Economic Organization: The Analysis of Discrete Structural Alternatives

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Comparative Economic Organization: The Analysis of Discrete Structural Alternatives

This paper combines institutional economics with aspects of contract law and organization theory to identify and explicate the key differences that distinguish three generic forms of economic organization--market, hybrid, and hierarchy. The analysis shows that the three generic forms are distinguished by different coordinating and control mechanisms and by different abilities to adapt to disturbances. Also, each generic form is supported and defined by a distinctive type of contract law. The cost-effective choice of organization form is shown to vary systematically with the attributes of transactions. The paper unifies two hitherto disjunct areas of institutional economics--the institutional environment and the institutions of governance--by treating the institutional environment as a locus of parameters, changes in which parameters bring about shifts in the comparative costs of governance. Changes in property rights, contract law, reputation effects, and uncertainty are investigated.(*) Although microeconomic organization is formidably complex and has long resisted systematic analysis, that has been changing as new modes of analysis have become available, as recognition of the importance of institutions to economic performance has grown, and as the limits of earlier modes of analysis have become evident. Information economics, game theory, agency theory, and population ecology have all made significant advances. This paper approaches the study of economic organization from a comparative institutional point of view in which transaction-cost economizing is featured. Comparative economic organization never examines organization forms separately but always in relation to alternatives. Transaction-cost economics places the principal burden of analysis on comparisons of transaction costs--which, broadly, are the "costs of running the economic system" (Arrow, 1969: 48). My purpose in this paper is to extend and refine the apparatus out of which transaction-cost economics works, thereby to respond to some of the leading criticisms. Four objections to prior work in this area are especially pertinent. One objection is that the two stages of the new institutional economics research agenda--the institutional environment and the institutions of governance--have developed in disjunct ways. The first of these paints on a very large historical canvas and emphasizes the institutional rules of the game: customs, laws, politics (North, 1986). The latter is much more microanalytic and focuses on the comparative efficacy with which alternative generic forms of governance--markets, hybrids, hierarchies--economize on transaction costs. Can this disjunction problem be overcome? Second, transaction-cost economics has been criticized because it deals with polar forms--markets and hierarchies--to the neglect of intermediate or hybrid forms. Although that objection has begun to be addressed by recent treatments of long-term contracting in which bilateral dependency conditions are supported by a variety of specialized governance features (hostages, arbitration, take-or-pay procurement clauses, tied sales, reciprocity, regulation, etc.), the abstract attributes that characterize alternative modes of governance have remained obscure. What are the key attributes and how do they vary among forms? This is responsive to the third objection, namely, that efforts to operationalize transaction-cost economics have given disproportionate attention to the abstract description of transactions as compared with the abstract description of governance. The dimensionalization of both is needed. Finally, there is the embeddedness problem: Transaction-cost economics purports to have general application but has been developed almost entirely with reference to Western capitalist economies (Hamilton and Biggart, 1988). Is a unified treatment of Western and non-Western, capitalist and noncapitalist economies really feasible? …