Firms, Markets, and Hierarchies: The Transaction Cost Economics Perspective

Firms, Markets, and Hierarchies: The Transaction Cost Economics Perspective

Firms, Markets, and Hierarchies: The Transaction Cost Economics Perspective

Firms, Markets, and Hierarchies: The Transaction Cost Economics Perspective

Synopsis

This book examines transaction cost economics, the influential theoretical perspective on organizations and industry that was the subject of Oliver Williamson's seminal book,Markets and Hierarchies (1975). Written by leading economists, sociologists, and political scientists, the essays collected here reflect the fruitful intellectual exchange that is occurring across the major social science disciplines. They examine transaction cost economics' general conceptual orientation, its specific theoretical propositions, its applications to policy, and its use in systematic empirical research. The chapters include classic texts, broad review essays, reflective commentaries, and several new contributions to a wide range of topics, including organizations, regulations and law, institutions, strategic management, game theory, entrepreneurship, innovation, finance, and technical information. The book begins with an overview of theory and research on transaction cost economics, highlighting the specific accomplishments of scholars working within the perspective and emphasizing the enormous influence that transaction cost reasoning exerts on the social sciences. The following section covers conceptual uses for the transaction cost framework and major theoretical or methodological elements within it, such as bounded rationality. While advancing some interesting theoretical propositions, these chapters are in fact more ambitious: each examines a specific field, area, or research program and attempts to fashion a new way of thinking about research questions. In the section on industrial applications, contributors study the application of transaction cost theory to a range of problems in utilities, telecommunications, laser printing, and early international trade. The book closes with four microanalytical chapters that delve into the structures and behaviors of specific aspects of firms and organizations: boards of directors, equity structures, employment models, human resource policies and practices, technology strategies, and innovation events. Firms, Markets, and Hierarchies collects excellent social science work on transaction cost economics, taking stock of its status, charting its future development, and fostering its renewal and evolution.

Excerpt

An increasing theme of modern economics, on which a large number of the variations have been composed by Oliver Williamson, is the role of nonmarket mechanisms in the operation of the market. It is not merely that many transactions take place without the intervention of the market mechanism: love, gifts, taxes, transfers, and regulation. It is more that the nonmarket mechanisms are essential to the workings of the market. Any standard economic theory, not only the neoclassical, starts from the existence of firms. Usually, the firm is a point or at any rate a black box. There are inputs and outputs, a production possibility set, and a motive--maximization of profits (possibly in some sophisticated form that takes account of uncertainty and the future).

But firms are palpably not points. They have internal structure. This internal structure must arise for some reason. Within the firm, there is necessarily a greater or lesser degree of decentralization of decision making, which must be regulated for efficiency in the same sense that prices regulate efficiency in competitive markets. The allocation within firms is not based on anything like markets (with the mild exception of transfer prices, which have as much to do with tax minimization as they do with achieving internal efficiency). Rather the within-firm allocation is authoritative and hierarchical, as Williamson puts it. It is very much a form of politics, not a form of economic behavior as portrayed in standard textbook theory. (Perhaps I shouldn't refer so assuredly to textbooks; by now much of the New Institutional Economics has penetrated even that backward corner of learning.) It may be based on rational considerations, but the opportunity and need for some bounded rationality are even more prominent than they are in a perfectly competitive market, where the consequences of decisions are measured by apparently simple formulas.

Why the firm finds a hierarchical structure preferable to market transactions, say by breaking up into parts, is too long a story to be referred to here. The analysis was adumbrated by Ronald Coase and developed with rich detail and application by Oliver Williamson and, more recently, Paul Milgrom and John Roberts. But one of the consequences of the study has been to shift the emphasis in economic research. Where the standard paradigm emphasizes resource allocation and perhaps degree of utilization of factors, the newer analysis asks different questions, though it also discusses the old ones. Why . . .

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