The Network Economy
Session Five
February 24, 2010
Information, Transaction
Costs & Organizational
Change
What Concerns to Beniger &
Williamson Have In Common?
The Role and
Cost of
Information in
the Economy.
How Do Beniger’s and
Williamson’s Solutions Differ
Williamson Looks to Organizational
Governance Structures.
Beniger Looks to Information
Technology Infrastructure.
Internal vs. External economies
How Does Williamson Differ
from Neo-classical Economists?
Information is impacted.
Rationality is bounded.
Institutions matter.
What Are the Origins of the
New Institutional Economics?
Kenneth Arrow—economies are subject
to ‘information failures.’
Karl Llewellyn—contracts are
governance structures.
Frederick Hayek—the role of
idiosyncratic knowledge at the local
level.
Origins, cont.
John R. Commons—business
organizations as governance
structures.
Frank Knight—the problem of moral
hazard.
Chester Bernard—organizations are
conscious, deliberate and purposeful.
Origins (cont.)
Herbert Simon—the notion of
‘bounded rationality.’
Alfred Chandler—organizational form
is a determinant of economic
performance.
Karl Polanyi—local knowledge is
created within different organizational
contexts.
Ronald Coase—if markets work, why
organizations?
What Was Williamson’s
Unique Contribution?
The notion of transaction costs as
the central explanatory variable
of economic performance and
governance structures.
What is Williamson’s Unit of
Analysis?
Transactions, Contractual Man, & the
Governance Frameworks that Order
Them!
Markets
Classical and neoclassical
contracts.
Bilateral vs. trilateral &
relational contracts
Vertically integrated firms
What Puzzle Led Williamson
to His Investigation?
What accounts for governance structures
& how they are organized?
How Does Williamson
Answer This Question?
Organizational forms are best
conceived of as means of addressing
transaction costs.
Governance forms differ, depending
on the nature of the transaction and
its costs.
Explanations are local in nature.
What Are Transaction Costs?
The information-related costs of
doing business. They include:
search costs
exchange costs
enforcement costs
Credit Cards from Andres Rueda
What Are the Origins of
Transaction Costs?
Bounded rationality
Opportunism with
guile
Asset specificity
In What Ways Can Assets Be
Specific?
Site specificity
Physical asset specificity
Human asset specificity
Dedicated assets
How Does Timing Affect
Transaction Costs?
 Adverse selection—an ex ante problem of
determining risks.
 Moral hazard—an ex post problem of
assuring that agreements are kept.
 One needs to look at this in their entirety
 Agency theory—efforts to reduce these ex
post uncertainties through ex ante
contracts—i.e. credible commitments, which
allow bargaining and contracting beyond the
ex ante stage
The Interdependence of
Technology, Contract, & Price
A
p1s
p2
K>0
B
S=0
S>0
p3
C
Contracting for general vs. special purpose technologies
Can Transaction Costs
Explain the Company Town?
Uncertainties
associated with
remote location and
low skill nature of the
job, workers unwilling
to build their houses.
Mine owners needed to be
assured they could cover
the costs of their
investment by limiting
competition.
The Company Town (cont.)
Change the situation and the bargain
changes. What happens when
mobility is assumed—auto, mobile
homes, etc.?
A means of exploitation – One needs
to consider all aspects of the local
situation.
Ghost Town of Coronet Worker House... from
Mike Woodfin
What About the Vertically
Integrated Firm
Backward integration-asset specificity
related to location and physical plant.
Forward integration—asset specificity
related to product differentiation,
and specialized consumer durables.
Anti-trust implications.
What Are the Choices of
Governance Structures?
Planning
Promise
Competition
Governance
Matching Situations &
Governance Structures
Asset
Bounded
Rationality Opportunism Specificity
Contracting
Process
0
+
+
Planning
+
0
+
Promise
+
+
0
Competition
+
+
+
Governance
In What Ways Can We
Characterize Transactions?
Standardized or idiosyncratic
Occasional or frequent
Certain or uncertain
When Do Bureaucratic
Solutions Justify Their Costs?
 For transactions supported by considerable
investments in transaction-specific assets.
 In cases where there is high uncertainty.
 The costs of specialized governance
structures will be easier to recover for
large transactions of a recurring type.
 A trade-off between economizing
transaction costs and neoclassical
production costs.
When Are Bureaucratic
Solutions Inappropriate?
When governance costs of internal
organizations exceed those of market
organization, and there is little asset
specificity.
When hierarchy creates problems of
bounded rationality.
Problems of management integrity .
The market is less forgiving.
What Governance Structures are Likely Given
the Prospect of Future Conditions
Blogging Question!