asset specificity and economic organization
TRANSCRIPT
-
7/27/2019 Asset Specificity and Economic Organization
1/14
In te rna t iona l Journa l of Indus t r ia l O rganiza t ion 3 (1985) 365-378. N or th-H ol land
A S S E T S P E C I F I C IT Y A N D E C O N O _ M I C O R G A N I Z A T I O N *
M i c h a e l H . R I O R D A N
Stanford University Stanford CA
9 4 3 0 5
U S A
O l iv er E . W I L L I A M S O N
Yale U~dversi ty New Haven CT 06520 USA
Fina l t ,ersion received M ay 1985
Th i s pape r exam i nes t he op t i m i za t ion p r ob l em o f f ir m and m a r ke t o r gan i za ti on i n w h i ch bo th
product ion cost and t ransact ion cost di fferences are expressed as a funct ion of asset specif ici ty.
I n gene r a l , m a r ke t s en j oy advan t ages by agg r ega t i ng t he dem ands o f m any buye r s , t he r eby
rea l inng economies of sca le or scope . Such product ion cos t savings need to be assessed in
re la t ion to the t ransac t ion cos t advantages tha t in te rna l organiza t ion somet imes enjoys over
marke t s in adapt ing to changed c i rcumstances . As i t tu rns out , both product ion cos t economies
and the t ransac t ion cos t d i f fe rences be tween f i rm and marke t organiza t ion vary sys temat ica l ly
wi th the charac te r is t i cs of the inves tments . Thi s paper emp loys a uni f ied framew ork to assess the
choice of organ izat ion form . Th e c on di t ion o f asset specif ici ty is featured.
1 . I n t r o d u c t io n
T r a n s a c t i o n c o s t e c o n o m i c s r e g a r d s t h e t r a n s a c t i o n a s t h e b a s i c u n i t o f
a n a l y s is a n d h o l d s t h a t th e o r g a n i z a t i o n o f e c o n o m i c a c t iv i ty i s l a r g e ly t o b e
u n d e r s t o o d i n tr a n s a c ti o n c o s t e c o n o m i z i n g t er m s . S u c h e c o n o m i e s a r e
r e a li z e d b y a l i g n i n g g o v e r n a n c e s t ru c t u r e s ( o f w h i c h f i r m s a n d m a r k e t s a r e
t h e l e a d i n g t y p e s ) w i t h t h e a t t r i b u t e s o f t r a n s a c t i o n s i n a d i s c r i m i n a t i n g w a y .
T e c h n o l o g i c a l f ea t u re s o f e c o n o m i c o r g a n i z a t i o n a r e th u s r e le g a t e d t o a
s e c o n d a r y r o l e b y t h i s a p p r o a c h . G i ~ ,e n t h a t s u c c e s s iv e s t a g e s o f e c o n o m i c
a c t i v it y a r e t e c h n o l o g i c a l l y s e p a r a b l e , h o w o u g h ~, t h e t r a d i n g i n t e r f a c e t o b e
o r g a n i z e d ? V e r t i c a l i n t e g r a t io n - o r , i n m o r e m u n d a n e t e r m s , t h e m a k e - o r -
b u y d e c i s i o n - i s t h e p a r a d i g m p ro bk ~m . T r a n s a c t i o n c o s t e c o n o m i c s
m a i n t a i n s t h a t t h e r e s o l u t i o n o f th i s is s u e t u r n s o n t h e a t tr i b u t e s o f t h e
*The autho rs a re Ass is tan t Professor of Economics , S tanford Univers i ty and G ord on B.
Tw eedy Professor of Eco nom ics of Law and Orsaniza t ion . Yale U niversi ty , r espec tive ly . Helpfu l
com me nts f rom A vinash Dixit , Da vid Sappington , Richard Schmalensee , Pa blo Spil le r and
ano nym ous referees a re gra te fu l ly acknow ledged.
0167-7187/85/ 3.30 1985, Elsevier Science Publ ishers B.V. (N orth-H olland )
-
7/27/2019 Asset Specificity and Economic Organization
2/14
366
M .H . Riordan and OE . Will iam~on ~. ~et spec if ici ty and economic organization
t r a n sa c t i o n , o f w h i c h t h e c o n d i t io n o f a s s c t sp ec if ic it y is th e m o s t i m p o r t a n t )
A v a r ie t y o f r e la t e d a n d so m e r a t h e r d i s t a n t c o n t r a c t u a l r e l a t io n s t u r n s o u t
to be va r i a t ions on th i s sam e unde r ly ing theme . 2 Th i s i s g r a t i fy ing s ince , a s
F r i ed r i ch H aye k (1967, p . 50) obse rved , w hene ver the capa c i ty o f r ecogn iz ing
a n a b s t r a c t r u le w h i c h t h e a r r a n g e m e n t o f t h e se a t tr i b u t e s f o ll o w s h a s b e e n
acqu i r ed in one f i e ld , t he same mas te r mould wi l l app ly when the s igns fo r
those a bs t r a c t a t t r ibu tes a r e evoke d by a l tog e the r d i f fe r en t e l emen t s .
A l t h o u g h t h i s t r a n sa c t i o n c o s t a p p r o a c h t o c o n t r a , i n g h a s b e e n g a i n i n g
w i d e r a c c e p t an c e , 3 i t is n o t n o w a n d d o e s n o t t h r e a t e n t o b e c o m e t h e n e w
o r t h o d o x y . E v en , m o r e o v e r , a m o n g t h o s e w h o a r e p e r s u a d e d t h a t a t r a n s -
ac t ion cos t o r i en ta t ion i s needed to ge t a t t he co re i s sues o f com pa ra t iv e
e c o n o m i c o r g a n i z a t i o n , t h e r e i s so m e d i s c o m f i t w i t h t h e a p p a r e n t d i s j u n c t i o n
b e t w e e n n e o c la s si c al a n d t r a n sa c t i o n c o s t m o d e s o f e c o n o m i c a n a l y s i s
w h e r e t h c f o r m c r e m p h a s i z e s p r o d u c t i o n c o s t s a n d v i e w s t h e f i r m a s a
p r o d u c t i o n f u n c t i o n , w h i l e t h e l a t t e r f o c u se s o n t r a n sa c t i o n c o s t s a n d r e g a r d s
the f i rm as a governance s t ruc ta r e .
B o t h a p p r o a c h e s , h o w e v e r , m a i n t a i n a n e c o n o m i z i n g o r i e n t a t i o n . A n d
p l a i n l y p r o d u c t i o n a n d t r a n sa c t i o n c o s t s b o t h n e e d t o b e t a k e n i n t o a c c o u n t
in any e f fo r t t o r ea l i ze a b road ly concc ived economiz ing r esu l t . Th i s paper i s
a n e f f o r t t o p u l l t h e se t w o c o s t c a t e g o r i e s t o g e t h e r i n a c o m m o n f r a m e w o r k .
I t i s h igh ly p re l iminary , i n tha t we (1 ) dea l on ly wi th po la r a l t e rna t ives ,
nam ely ncoc lassi ca l ma rke t s and h ie r a r ch ica l f i rms o f ve ry s ty l ized k inds , (2 )
l o o k a t o n l y o n e t r a n sa c t i o n a t a t i m e , a n d ( 3 ) e m p l o y a r e d u c e d f o r m t y p e
o f a n a l ys i s, in t h a t w e a sc r ib e r a t h e r t b a n d e r iv e t h e b a s i c p r o d u c t i o n a n d
g o v e r n a n c e c o s t c o m p c t e n c i e s o f f ir m s a n d m a r k e t s . 4
Th e p a p e r m a i n l y c o n f i r m s i m p l i c a t i o n s t h a t h a v e b e e n a d v a n c e d e a r l i e r
us ing more heur i s t i c a rgument s . I n th i s sense , t hc re a r e f ew su rp r i ses -
though th i s may be a su rp r i se to those who ho ld d i f f e r en t p r io r s . Surp r i ses o r
1 T h e a r g u m e n t i s a d v a n c e d a n d a s s e s s e d i n t h e t h e o r e t i c a l , e m p i r i c a l , a n d p u b l .~ c p o l i c y
l i te r a t u re s i n w h i ch t r a n s a c t i o n c o s t e c o n o m i c s is f e a t u re d . T h e t h e o r y i s se t o u t i n W i l l i a m s o n
( 1 9 7 1 , 1 9 75 , 1 9 7 9 , 1 9 83 , 1 9 85 ), K l e i n e t a l . ( 19 7 8 ) , M a s t e n ( 1 9 8 2 ), a n d A l c h i a n ( 1 9 8 4 ).
C o r r o b o r a t i n g e v i d en c e is d e v e l o p e d in S t u c k e y (1 9 8 3) , M o n t e v e r d e a n d T e e c e (1 98 2) , P a l a y
( 1 9 8 4 , 1 9 85 ), M a s t e n ( 1 9 8 4 ) , W a l k e r a n d W e b e r ( 1 9 8 4 ), A n d e r s o n a n d S c h m i t t le i n ( 1 9 84 ), a n d
J o s k o w ( 19 8 5) . A p p l i c a t i o n s t o p u b l i c p o l i c y i n c l u d e W i l l i a m s o n ( 1 9 7 6 , 1 9 82 ), a n d J o s k o w a n d
S chmalens ee (1983) .
2 V a r i a t i o n s o n t h e b a s i c t r a n s a c t i o n c o s t e c o n o m i z i n g t h e m e i n c l u d e a p p l i c a t i o n s t o l a b o r
m a r k e t o r g a n i z a t i o n , v e r t i c a l r e s t ri c t io n s o f v a r i o u s k i n d s , f r a n c h i s in g , r e c i p r o c a l t r a d i n g
( in c l u d in g p r o d u c t e x c h a n g e a g r e em e n t s ) , re g u l a t io n , c o r p o r a t e g o v e r n a n c e , a n d e v e n fa m i l y
o r g a n i z a t i o n . T h i s i t o t i s t r e a t e d b y B e n - P o r a t h ( 1 9 8 0 ) a n d P o l l a k ( 1 9 8 5 ) . T h e o t h e r s a r e
d i s c u s s e d i n W i l l i a m s o n
1 9 8 3 ) .
a A I c h ia n , w h o o n c e h e l d o t h e r w i s e , n o w a g r e e s t h a t a s s e t sp e c i f ic i t y .~ t h e k e y c o n d i t i o n o n
w h i c h t h e s t u d y o f f ir m a n d m a r k e t o r g a n i z a t io n t u r n s ( 1 9 8 4, p p . 3 8 - 3 9 ). T h e r e c e n t t r e a t m e n t
o f v e r ti c a l i n t e g ' a t io n b y G r o s s m a n a n d H a r t ( 1 98 4 ) a l s o a s s u m e s a c o n d i t i o n o f a s s e t
specif ic i ty .
* I t i s t h u s a k i n t o M ~ s t e n ' s e a r li e r t r e a t m e n t o f t h e s e m a t t e r s ( l ' .~ z ) . W h i l e o u r a n a l y s i s i s
m o r e e x p a n s i v e , h i s t r e a t m e n t a n d ~ u r , ; b o t h e m p l o y r e d u c e d f o r m e x p r e s s i o n s .
-
7/27/2019 Asset Specificity and Economic Organization
3/14
M .H . R iordan and O.E. Wil liamson Ass et speci fici ty and economic organization
67
no t , t he sp i r i t o f t he ana lys i s is co nso na n t wi th th a t o f econo m ics q u i te
genera lly : u se m ore genera l m ode s o f ana lys i s a s a check on the lh -n it a tions
t h a t i n f o rm m o r e s~ c i a l i z e d t y p e s o f r e a so n i n g . Th i s p a p e r e m p l o y s a u n if ie d
f r a m e w o r k t o m a k e a m o d e s t s t e p i n th e d i re c t i o n o f f o r m a l i z a ti o n . W h i le w e
remain somewhat agnos t i c - be l i ev ing , a s we do , t ha t t he re a r e bo th cos t s
and benef it s t o fo rmal i za t ion - i t i s i n the sp i r i t o f K enn e th A r row 's r ecen t
r e m a r k s t h a t n e w t h e o r ie s o f e c o n o m i c o r g a n i z a t io n t a k e o n g r e a t e r 'a n a l y ti c
use lu lness when these a r e founded on more d i r ec t ly neoc lass i ca l l i nes ' [Ar row
(1985, p. 303)].
The heur i s t i c mode l and the f ac to r s r e spons ib le fo r cos t d i f f e r ences among
f i r m a n d m a r k e t m o d e s a r e sk e t c h e d i n s e c t i o n 2 . Th e m a i n m o d e l , i n w h i c h
asse t spec i fi c ity has on iv cos t bu t no de m an d e f fec ts , i s t hen se t ou t i n sec t ion
3 . D e m a n d f e a tu r e s a , e t h e o b j e c t o f a n a ly s i s in s e c t io n 4 . C o n c l u d i n g
r e m a r k s f ol lo w .
2 T h e h e u r is t ic m o d e l
2 1 A s : : e t s p e c i f i c i t y
Tr a n sa c t i o n c o s t e c o n o m i c s m a i n t a i n s t h a t t h e p r i n c i p a l f a c t o r t h a t i s
r espons ib le fo r t r ansac t ion cos t d i f f e r ences among t r ansac t ions i s va r i a t ions
in asse t spec i f i c i ty . Transac t ions tha t a r e suppor t ed by non- spec i f i c ( r ede -
p loyab le ) i nves tmen t s a r e ones fo r wh ich neoc lass i ca l ana lys i s i s we l l - su i t ed
to dea l. As a cond i t ion o f a sse t spec if ic i ty becomes m ore im po r t an t , however ,
e x c h a n g e r e l a t i o n s t a k e o n a p r o g r e s s i v e l y s t r o n g e r b i l a t e r a l t r a d i n g c h a r a c -
t e r . The r eason i s t ha t pa r t i e s to such t r ades have a s t ake in p rese rv ing the
con t inu i ty o f t he r e l a t ionsh ip . S imu l t aneous ly , however:, p rob lem s o f ada p t ing
b i l a t e r a l c o n t r a c t s t o c h a n g i n g c i r c u m s t a n c e s p r e d i c t a b l y a r i s e . A u t o n o m o u s
m a r k e t c o n t r a c t i n g is th u s s u p p l a n t e d b y m o r e c o m p l e x f o r m s o f g o v e r n a n ce
as a sse t speci fi c ity deepens . N ew fo rms o f d i spa te se t t l emen t ( such as
a r b i t r a t i o n ) m a y b e c r e a t e d . S o m e t r a n sa c t i o n s m a y b e r e m o v e d f r o m t h e
m a r k e t a n d o i g a n i z e d i n t e r n a l l y i n s t e a d . Th e h e u r i s t i c m o d e l g i v e s c o n t e n t t o
t h i s f i r m o r m a r k e t ( m a k e o r b u y ) o r i e n t a t i o n .
2 2 G o v e r n a n c e c o s t s
Tr a n sa c t i o n c o s t e c o n o m i c s m a i n t a i n s t h a t t ; o m p l e x , b i l a t e r a l c o n t r a c t s a r e
invar i ab ly incomple te . Con t ingenc ies wi l l t hus a r i se fo r wh ich the appropr i a t e
adap ta t ions have no t been express ly a reed upon ex an te . Al though i t i s
a lwa ys in the m utua l i n t e r es t o f t he pa r t i e s to ad ap t e f fi c ien tly , t he
d i spos i t ion o f the ga in mu ' ; t be r e so lved . As co m par ed wi th un i f ied ow ner -
sh i p o f t h e t w o s ta g e s, a u t o n o m o u s o w n e r sh i p n o r m a l l y g i v es ~ is e t o m o r e
in tens ive , se l f- in t e res t ed ba r ga in ing over the a l loca t ion o f the ada p t ive ga ins .
-
7/27/2019 Asset Specificity and Economic Organization
4/14
3 6 8 M .H. Riordan and O .E. Williamson Asset specificity and economic organization
Added con t rac t execu t ion cos t s the reby resu l t . Autonomous ownersh ip may
therefore forego some potent ia l ly benef idal adapta t ions a l together . The
upshot i s tha t in ternal organizat ion enjoys a progress ive governance cost
adv antag e over m ark et o rganizat ion as the con di t ion of asse t specifici ty
deepens.
The se differential costs of ad ap tatio n (expressed as a function of asset
specifici ty) are not, however, the only transaction costs that dist inguish firm
and m arke t. A lso im po rtan t , tho ug h ic3s well deve ,oped, are the d ifferential
incentive an d burea ucra t ic costs of f i rm an d m ark et organizat ion. A o
developed e lsewhere [W il l iam son (1985 , ch . 6)] , mark ets are e xtrao rdin ar)
insti tution s for delivering high-pow ered incentives. Best efforts to p reserve
m arket-l ike incentives (e.g., t ransfer pricing an d a po rop riab il i ty rules) w ithin
unif ied ownership notw iths tan ding , in ternal orga nizat ion u nav oida bly ex-
periences incentive degradation. Also, internal organization experiences a
ser ies of bureaucra t ic d is tor t ions (m anag em ent excesses , investm ent renewal
biases, an d the l ike) as comp ared wi th m ark et organizat ion. Bo th of these
incentive and bureaucra t ic effec ts , mo reover , a re re lat ively independ ent of the
co nd ition of ass,~t specificity.
Accordingly , whereas in ternal orgdnizat ion is a t a t ransact ion cost d is-
advantage to the market where asse t specif ic i ty is s l ight , th is d isadveatage
deCreases and is even tually reversed as th e c ond it ion of asset specifici ty
deepens. This is shown in f ig. 1 by the curve
AG) ,
which shows the
t ransact ion cost d i f ference between f i rm and market organizat ion as asse t
specifici ty increases (for a given lev el of ou tput) . Th e intercep t (f lo) is posit ive
and the curve has a negat ive s lope throughout .
13o
F i g 1 H e u r i s t i c m o d e l
-
7/27/2019 Asset Specificity and Economic Organization
5/14
M.H. Riordan and O.E. WiUiamson, Asset speco ~city ard economic organization 69
2.3 . Product ion cos ts
I t c a n b e a n d h a s b e e n a rg u e d th a t f i rm a n d ma rk e t a r e i d e n t i c a l i n
prod uc t io n cc =t re spec ts . To be su re , ou ts ide p roc urem ent m igh t appea r to
be favored i f a f i rm ' s needs fo r a goo d o r se rv ice a re n o t su f f ic ien t to supp or t
a p l a n t o f m in i m u m e ff ic ie n t s ca le . Th e s a m e wo u ld a p p e a r t o b e t r u e fo r
i t e ms th a t e x p e r i en c e e c o n o mie s o f sc o pe . Bu t s in c e th e f i rm c a n a lwa y s
rea l ize the same sca le o r scope ec tmora ies a s an ou ts ide supp l ie r , by se l l ing
p ro d u c t t h a t e x c ee d s i ts o wn n e e d s o n t h e m a rk e t , t h e f i rm n e e d n o t a n d
p re s u m a b ly w i l l n o t e x p e r i e n c e p ro d u c t io n c o s t d i s e c o n o m ie s o f e i t h e r k in d.
Th is a rgument a ssumes , however , tha t a f i rm can se l l to o the rs , inc lud ing ,
o f ten , it s r iva l s , a s e f fec tive ly as ca n an ind epe nd en t supp l ie r . I t a l so igpores
th e p o s s ib i l it y t h a t t h e i n c e n t iv e a n d b u re a u c ra t i c c o s ts r e f er re d t o a b o v e
h a v e c u mu la t i v e f e a tu r e s . Up o n ma k in g a l l o wa n c e fo r t h e s e , t h e f i rm wo u ld
a p p e a r t o b e a t a p ro d u c t io n c o s t d i s a d v a n ta g e i n r e l a t i o n t o t h e ma rk e t .
These p roduc t ion cos t d i seconorn ies , however , a re a l so a func t ion o f a sse t
speci fic ity . Th e d isecon om ies a re a rg uab ly g re a t where asse t spec if ic ity i s
s l igh t , s ince the ou ts ide supp l ie r he re can p roduce, to the needs o f a wide
var ie ty o f buyers us ing the ve ry same ( la rge sca le ) p roduc~.on techno logy . As
asset specif ic i ty increases , howe ver , the outs ide suppl ie , ~pecia lizes h is
in v e s tme n t i n r e l a t i o n t o t h e b u y e r . Th i s i s t h e mc a t , p g o f n o n -
redep loyab i l i ty . As these asse t s become h igh ly un ique , moreover , the f i rm can
essen t ia l ly rep l ica te the inves tm ents o f an ou ts ide supp l ie r wi thou t pena l ty .
T h e f ir m a n d m a r k e t p r o d u c t i o n t e c h no l o g y t h u s b e c o m e i n d i s ti n g u i s h a b le a t
this stage.
P ro d u c t io n c o s t d i ff e re n c es b e twe e n f i rm a n d ma rk e t , w h c , 'e b y th e f irm
exper iences a p rodu c t ion cos t p ena l ty wh en asse t spec i f ic i ty i s s l igh t bu t
these cos t d i ffe rences asy m pto t ic a l ly ap pro ac h ze ro as a sse t spec if ic i ty
b e c o me s g r e a t , a r e s h o wn b y th e c u rv e A C in f ig 1. As w ith the A G curve,
the
A C
curve i s d ra w n fo r a f ixed leve l o f ou tpu t .
2.4 . C om bin ed e f fec ts
To ta l c o s t d i ff er e nc e s o f f i rm a n d m a rk e t o rg a n iz a t i o n a r e g iv e n b y th e
ver t ica l sum, A C A G . Th is cu rve i s pos i t ive in i t i a l ly bu t has a ne lza t i', e
s lop e t h ro u g h o u t a n d b e c o me s z e ro a t ,4. Th e h e u r i st i c mo d e l o f f i rm a v J
m arke t o rga n iza t ion thu s supp or t s the lo t owing genera l conc lus ions : (~)
m a rk e t o rg a n iz a t i o n i s t h e l ea s t c o st m o d e i f t h e o p t ima l v a lu e o f a s se t
spec if ici ty i s smal l ; (2 ) in te rna l o rgan iza t ion i s the leas t cos t m od e i f the
op t im a l va lue o f a sse t spec i f ic i ty i s g rea t; an d (3 ) ne i the r m ode en joys a
s ig n i fi c a n t a d v a n ta g e ( t h a t is , i t d o e s n ' t m a t t e r m u c h wh ic h m o d e i s c h o se n )
fo r a sse t spec i f ic i ty va lues in the ne ig hbo rho od o f A.
Th e s e r e s u lt s ar e o b t a in e d , h o we v e r, b y a s s u m in g th a t b o th mo d e s
prod uce the same leve l o f ou tp u t and tha t the op t im a l level o f a ssel
-
7/27/2019 Asset Specificity and Economic Organization
6/14
37
M.H. Ric: dan and O.E. Williamson, Asset specificity and economic organizction
spec i f i c i ty i s t he same fo , each . What happens when these : f impl i fy ing
a s su m p t i o n s a r e re la x ed " ., M o r e g e n e r al ly , w h a t h a p p e n s w h e n t he a b o v e
r e l a ti o n s o f f ir m a n d m a r k e t o r g a n ~ a t i o n a r e d ig e s t ed i n a m a x i m i z i n g
f r a m e w o r k o f t h e m o r e f a m i l ia r n e o c la s s ic a l k i n d ?
3 T h e m a i n m o d e l
The cos t d i f f e r ences d i scussed above a r e r espons ib le fo r t he r educed fo rm
geomet ry shown in f ig . 1 . The main mode l examined here i s i n the same
sp i r i t . T~e r e su l t i n g m o d e l s a r e so m e w h a t m o r e g e n e r a l , h o w e v e r . W e
e x a m i n e ~h e i r f i rs t -o r d e r m a x i m i z i n g a n d c o m p a r a t i v e s t a ti c s p r o p e r t ie s . I t
wi l l f ac i i ; a t e the a rgument to assume in i t i a l ly tha t f i rm and marke t have the
iden t i ca i a roduc t ion cos t t echno logy . Th i s a ssumpt ion wi l l be r e l axed in
sec t ion D em an d f ea tu res o f a sse t spec if ic i ty a r e r ese rved fo r sec t ion 4 .
3.1. Con;ton production technology
Revenue i s g iven by R = R X ) , a n d p r o d u c t i o n c o s ts o f m a r k e t a n d
i n t e r n a l p r o c u r e m e n t a r e a s su m e d t o b e g i v e n b y t h e r e l a t i o n
C = C X , A ; ~ ) , C x > O ,
C A < 0 , C x A < 0 ,
where the pa ram ete r i s a sh i ft pa r am ete r , a h igher v a lue o f ~t y i e ld ing
greater cost reducing consequences to asset speci f ic i ty ,
CA~ < O, Cx~ < O.
Asse t specif ic i ty i s ass um ed to be av ai lab le a t the co ns tan t pe r un i t cost o f ~,.
The nec ss ica l p ro f i t express ion co r r e spo nd in g to th i s s t a t e m en t o f r evenue
a n d p r o d u c t i o n c o s t s i s g i v e n b y
7 r * X , A ; ~ ) =
R X ) - C X , A ; ~ ) - 7 A .
Governar ; ce cos t s a r e consp ic ious ly omi t t ed f rom th i s p ro f i t r e l a t ion , t he re
be ing no p rov i s ion fo r such cos t s i n the neoc lass i ca l s t a t emen t o f t he
prob lem.
W e a s su m e t h a t t h i s f u n c t i o n i s g l o b a l l y c o n c a v e . A t a n i n t e r i o r m a x i m u m
the dec i s ion va r i ab les X* , A* a re de te rmined f rom the ze ro marg ina l p ro f i t
c o n d i t i o n s
rc](X, A; ~) = 0 , x* (X , A; ~ )= 0.
C o n s i d e r n o w t h e g o v e r n a n c e c o s ts o f i n t e rn a l a n d m a r k e t o r g a n i z a t i o n .
-
7/27/2019 Asset Specificity and Economic Organization
7/14
M.H. Riordan and O.E. Williamson Asset specificity and economic organization 37
Le t t h e s u p e r s c r ip t s i d e n o t e i n t e r n a l a n d m d e n o te m a r k e t o r g a n i z a t i o n .
G ov ern anc e cos t express ions cong ruen t w i th the cos t d if ferences desc r ibed
a b o v e a r e g iv e n b y
Gi=fl+ V(A), f l>O , V A >O ,
Gm=W(A), W A > O ,
where WA> I+ i, e v a lu a t e d a t c o m m o n A .
Th e c o r r e s p o n d in g p r o f i t e x p r e s s io n s f o r i n t e r n a l m a r k e t p r o c u r e m e n t i n
the face o f pos i t ive governance cos t s a re
u I = R X ) - C X , A ; a ) - ~ A - f l + V A ) ) ,
n m= R( X) -C (X , A; a) - ~,A- W(A).
Th e z e r o m a r g in a l p r o f i t c o n d i t i o n s f o r i n t e r n a l p r o c u r e m e n t a r e
n x=Rx-Cx=O, rr ~= - C a - y -
VA=0.
T h o s e fo r m a r k e t p r o c u r e m e n t a r e
~ ~ = R x - C x = O , l r ~ = - C a - 7 - W A = O .
In e ach in s tance , there fo re , op t im a l o u tpu t , g iven a sse t spec if ici ty , i s
o b t a in e d b y s e t t i n g m a r g in a l r e v e n u e e q u a l t o t h e m a r g in a l c o s t s o f
p rodu c t ion , wh i le op t im a l a s se t spec i f ic i ty , g iven ou tpu t , i s chosen to
m in im iz e t h e s u m o f p r o d u c t i o n a n d g o v e r n a n c e c o s ts .
Given that rr~.A= - CxA>0 , t h e n e o c l a ss i c a l l o c u s o f o p t im a l o u tp u t g iv en
asse t spec i f ic i ty an d the co r r esp ond ing locus o f c , p t im a l a s se t spec i f ic i ty g iven
o u tp u t w i l l b e a r t h e r e l a t i o n s s h o w n b y n =0 a n d ~ r * =0 in f i g . 2 . Th e
c o r r e s p o n d in g l o c i f o r i n t e r n a l a n d m a r k e t o r g a n i z a t i o n a r e a l s o s h o w n .
I n a s m u c h a s t h e z e r o m a r g in a l p r o f i t e x p r e s s io n s f o r o u tp u t f o r a l l t h r e e
s t a t e m e n t s o f th e m a x im a n d a r e i d e n ti c a l, th e l oc i z r ~r =0 a n d 7 r ~=0 t r ac k
re* = 0 exact ly . Th e zero m ar gi na l prof i t exp ress io ns for asse t specif ici ty , how ever ,
d if fer. G ive n tha t WA > VA > 0 , the locus r r ~ = 0 is everyw here be low 7r~ = 0,
wh ich in tu rn i s be low r r~=0 . Accord ing ly , we obse rve tha t p ro f i t max imiz -
in g v alu e s o f X a n d A f o r th e s e th r e e s t a t e m e n t s o f th e o p t im iz a t i o n p r o b l e m
bear the fo l lowing re la t ion to each o ther : X* > X i > X m and A* A > Am.
The output e f fec ts a re indirec t or induced effec ts , a t t r ibutable to sh if ts in the
zero marginal prof i t asse t specif ic i ty loc i .
O f course , the X * and A* cho ices a re pu re ly hypo the t ica l s ince , in rea li ty ,
a ze ro t ransa c t ion cos t cond i t ion i s no t a m em be r o f the feas ib le set . The
-
7/27/2019 Asset Specificity and Economic Organization
8/14
372 M .H . Riorda n and O.E. Wil liamso 1 Ass et speci f ici ty
nn
economic organiza t ion
= 0
m
A:U
/ l i n
t I / i
/ - / | :
/ /
|
I / i n
n
/ i
u /
i n
t / i . a
i
X X~ X X
F i g . 2 . F o r nxA > O.
r e le v a n t c h o ic e s t h u s r e d u c e t o u s i n g i n p u t c o m b i n a t i o n s I u n d e r i n t e r n a l
p r o c u r e m e n t o r M u n d e r m a r k e t p r o ~ u r em e n t . A n im m e d i a t e i m p h c a t i o n is
t h a t i f t h e fi rm w e r e o p e r a t i n g i n t w o i d e n t ic a l m a r k e t s a n d w a s c o n s t r a i n e d
t o b u y i n o n e a n d t o m a k e in th e o th e r i t w o u l d s e ll m o r e g o o d s o f a m o r e
d i s t i n c t i v e k i n d i n t h e r e g i o n w h e r e i t p r o d u c e d t o i t s o w n n e e d s .
O r d i n a r i l y h o w e v e r t h e f ir m w i ll n o t b e s o c o n s t r a i n e d b u t w ill c h o o s e
t o m a k e o r b u y a c c o r d i n g t o w h i ch m o d e o f fe r s t h e g r e a t e s t p r o f it in e a c h
r e g i o n . F i g . 3 s h o w s p r o f i t a s a f u n c t i o n o f a s s e t sp e c i fi c it y t h e c h o i c e o f
o u t p u t a s s u m e d t o b e o p t i m a l f o r e a c h v a l u e o f A . W h e r e a s t h e r e is a fa m i l y
o f n i c u r v e s o n e f o r e a c h v a l u e o f t h e b u r e a u c r . f i c c o s t p a r a m e t e r fl t h e r e i s
A m A
F i g . 3
A
-
7/27/2019 Asset Specificity and Economic Organization
9/14
M H. Riordan and O.E. Williamson, Asset specificity and economic organization
373
o n ly a s in g le gm c u rv e . W h ic h m o d e i s f a v o re d d e p e n d s o n wh ic h h a s t h e
h ig h e s t p e a k . T h i s i s t h e i n t e rn a l mo d e fo r f l=flo b u t t h e m a r k e t m o d e f o r
f l=f l l , wh e re f l : > f lo . T h e o p t im a l v a lu e o f A a n d X d e p e n d s o n ly o n th e
m ode se lected and no t on f l, however , s ince fl does no t in f luence the
m a rg in a l c o n d i ti o n s .
T h e c o m p a ra t i v e s t a t ic s r a m i f i c a t i o n s o f t h e p ro d u c t io n c o s t p a r a m e te r
a r e mo re c e n t r a l t o o u r i n te r e st s . Ap p l i c a t i o n s o f th e e n v e lo p e t h e o re m r e ve a l
th a t
7fma= - - C : X m,
A m , ~ x , ~ i = _
C a X i,
A i, 0t .
I n a sm u c h a s X i > X m a n d A i > A m , i t f o ll o ws f ro m o u r e a r l ie r p ro d u c t io n c o s t
ass um pti on s tha t n ~_> n~. In o the r words , a s a sse t spec i fic ity has g rea te r cos t
r e d u c in g imp a c t , i n t e rn a l o rg a n iz a t i o n i s p ro g re s siv e ly fa v o re d .
3.2. Production cost differences
Co n s id e r n o w th e c a s e , t o wh ic h we r e f e r r e d e a r l i e r a n d i s a rg u a b ly t h e
mo re r e a l i s t i c , wh e re t h e f i rm i s u n a b le t o a g g re g a t e d e ma n d s a n d s e l l
p ro d u c t t h a t e x c e e d s i t s o wn d e ma n d s w i th o u t p e n a l ty . L e t H X , A ) deno te
th e p ro d u c t io n c o s t d i s a d v a n ta g e p e r u n i t o f o u tp u t a s s o c ia t e d w i th i n te rn a l
o rg a n iz a t i o n . T h e p ro d u c t io n c o s t s o f t h e two m o d e s t h e n a r e
c m = c X , A , o t ) ,
Ci=C X,A;a)+H X,A)X.
A s s u m e t h a t H x < 0 a n d H a < 0 b u t th a t H X , A ) X i s pos i t ive and asympto t i -
c a l ly a p p ro a c h e s z e ro a s X a n d A a p p ro a c h in f in i ty . De n o te t h e ma rg in a l
p ro d u c t io n c o s t d i s a d v a n ta g e b y M X , A ) = H x X , A ) X + H X , A ).
T h e a n a ly s i s d e p e n d s o n th e wa y in wh ic h t h e t o ta l p ro d u c t io n c o s t
d i s a d v a n ta g e e x p e r ie n c e d b y in t e rn a l o rg a n iz a t i o n c h a n g e s fo r o u tp u t s w i th in
the re levan t range . At low leve ls o f ou tpu t , dec reas ing un i t cos t d i s -
a d v a n ta g e s w i l l n o rm a l ly b e a t t e n d e d b y a n i n c r e a s in g to t a l c o s t, w h e n c e
M X , A )> O . Bey ond som e th resh o ld leve l o f ou tpu t , how ever , the to ta l
p ro d u c t io n c o s t d i s a d v a n ta g e o f i n t e rn a l o rg a n iz a t i o n w i l l b e g in t o d e c l in e .
Indeed , a s the f i rm progress ive ly inc reases in re la t ion to the s ize o f the
ma rk e t , t h e p ro d u c t io n c o s t d i s a d v a n ta g e p r e s u m a b ly a r ;p ro a c h e s z ero -
s in c e f i rm a n d ma rk e t h a v e a c c e s s t o i d e n t i c a l e c o n o mie s o f s c a l e a s a
mo n o p o ly c o n d i t i o n e v o lv e s . Ac c o rd in g ly , M X , A ) < 0 once th i s th resho ld i s
crossed.
O u r m a in r e s u lt s a r e s tr e n g th e n e d wi th in th e l a rg e o u tp u t ) r a n g e wh e re
M(X,A)< xm~xi; A m < A i ; a n d i m
, ,>n , , . W i th in the smal l ou tpu t ) range ,
however , where M x > O , t h e ma rg in a l p ro d u c t io n c o s t d i s a d v a n ta g e o f
i n t e r n a l o r g a n i z a t i o n a n d t h e m a r ~ n a l g o v e r n a n c e c o s t d i s a d v a n t a g e o f
-
7/27/2019 Asset Specificity and Economic Organization
10/14
374
M .H. R iordan-and O.E. W ill iamson Asse t speci fici ty and economic organizat ion
ma rk e t p ro c u re me n t o p e ra t e i n o p p o s i t e d i r e c t i o n s . An u n a mb ig u o u s o rd e r -
ing o f op t im al ou tpu t an d asse t spec if ic ity i s no t poss ib le in te rms o f the
above-desc r ibed qua l i ta t ive fea tu res o f the p rob lem in th i s ins tance . An
anomaly thus a r i ses tha t ,~as no t ev iden t in the heur i s t ic p resen ta t ion in
section 2.
4 D e m a n d e ff ec t s
A noth er poss ib i l i ty i s tha t a sse t spec if ic ity y ie lds des ign benef i t s bu t has no
d i rec t e f fec t on p roduc t ion cos t s . Thus suppose tha t a d ie can be shaped to
prod uce a very specia l effect a ta i l f in on a n au tom obile ) , a sem i-spe cia l ..~ect
{ in tha t the d ie can be redep loye d , a lbe i t a t red uced va lue) , o r a s ta nd ard
p ro d u c t. P ro d u c t io n c o s t d if fe re n c es m a y b e a n d wi l l b e a s s u m e d to b e )
insubs tan t ia l . The main e f fec t s t ake the fo r ra o f demand sh i f t s and gover -
nance cost chat~ges.
The th ree p ro fi t express ions cor respo nd in g to th i s s ta ten :en t o f the
p r o b l e m a r e
= R X , A ; - C X ) - r A ,
7c = R X , A ; ~ ) - C X ) - ? A - W A ) ,
r c ~ = R X , A ; ~ ) - C X ) - T A - f l + V A ) ) ,
where
R a
>0 Rxa> 0 , RA~> 0 , Rx~ Oa n d 6 i s a d e m a n d s h i f t p a r a me te r .
Aga in , the locus o f op t imal X g iven A wi l l be iden t ica l fo r each o f these
prof i t express ions , whi le the locus o f op t imal A g iven X wi l l move p ro -
g ressive ly dow n f rom neoc lass ica l to in te rn a l to m arke t in tha t o rder . The
o u tp u t a n d a s se t sp e c if ic it y r e l a ti o n s r e p o r t e d u n d e r t h e m a in m o d e l a r e t h u s
p re s e rv e d . I n c r e a s e s i n t h e d e ma n d e n h a n c e me n t p a r a me te r 6 , mo re o v e r ,
have the expec ted e ffec t: in te rna l o r gan iza t io n i s re la t ive ly favored over
m a rk e t o rg a n iz a t i o n a s t h e d e m a n d e n h a n c e m e n t effe cts o f a d d e d s p e ci fi c it y
in c re a s e . T h e d i f f e r e n t i a l a d v a n ta g e o f i n t e rn a l o rg a n iz a t i o n i s e x p la in e d b y
the respec t ive marg ina l governance cos t pena l t ie s tha i acc rue to asse t
spec if ici ty unde r f i rm and m ark e t modes .
5 C o n c l u s i o n s
T h e f o re g o in g d e m o n s t r at e s t h at c o n v e n t i o n a l d e m a n d a n d p r o d u c t i o n
c o st a n a ly s i s c a n b e a u g m e n te d to i n c l e d e g o v e rn a n c e c o s t f e a tu r es . T h e
comi~,a ra tive ins t i tu t iona l ram if ica t ions o f the tw o can then be ex p lo red . Th e
a p p a re n t g a p b e twe e n th e o r th o d o x th e o ry o f t h e f i .rm a n d th e t r a n s a c t io n
c o st e c o n o mic s a p p ro a c h to t h e s tu d y o f f i rm a n d m a rk e t s t r u c tu r e s i s t h u s
nar rowed as a consequence .
-
7/27/2019 Asset Specificity and Economic Organization
11/14
M . h . R i o r d a n a n d O . E . t V i l l ia m s o : A s s e t sp e c i fi c it y a v d e c o n o m i c ~ g a n i : a t i o n 75
E x t e n s i o n s t o t h is a p p r o a c h a r e , m o r e o v e r ,
p o s s i b l e
A p r o g r e s s i , , e o p e r a -
t i o n a l i z a . i o n o f t h e e c o n o m i c s o f t r a n s a c t i o n c o s t s w il l t h e r e b y r e s u lt . A h i g h
p r i o r it y fo r f u r t h e r r e se a r c h s h o u l d b e a n a ss e s s m e n t o f ; o ~ p a r a , . i~ t r a n s -
a c t i o n c o s t s w i t h i n m o r e s p e ci fi c m o d e l s o i o r g a n i z a t i o n a l c L-)ic e.
W i t h r e f e r e n c e t o c o n s u m e r w e l f a r e , l h e m a i n i m p l i c a t i o n o f t h e a rg ;,A n era t
i s t h is : f i r m s t h a t d e c i d e f o r p r o f i t a b i li t y r e a s o n s t o i n t e g r a t e ( p w d u c e t o
t h e i r o w n n e e d s) w i ll p r o d u c e m o r e a n d r e a li z e lo w e r c o s ts t h a n i f t h e y w e r e
c o n s t r a i n e d b y p u b li c p o li c y to p r o c u r e f r o m t h e m a r k e t . N o t e in th i s
c o n n e c t i o n t l ' a t w e t r e a t a ll c o s t s - p r o d u c t i o n a n d g o v e r n a n c e , m a r k e t a n d
i n t e r n a l - a s so c i a l c o s ts . M a r k e t g o v e r n a n c e c o s t s d o n o t t h e r e f o r e r e fl ec t
r e n t s b u t r a t h e r a r e a d d e d c o s t s d u e t o m a l a d a p t i o n [ b e i n g o f f t h e 's h if ti n g
c o n t r a c t c u r v e ' , in th e l a n g u a g e o f M a s a h i k o A o k i ( 19 8 4) ] e n d h a g g l in g
c o s t s . T h e s e a r e r e a l c o s t s f o r w h i c h f u l l s o c i a l c o s t v a l u a t i o n i s w a r r a n t e d .
T h e m o d e l s a n d th e a b o v e w e l fa re a r g u m e n t m a k e no provis ion h o w e v e r ,
fo r s t ra teg ic behav ior . S t r a te g i c i n c e n ti v e s t o i n t e g r a t e i n t r u d e w h e r e i n t e g r a t i o n
b y a fi r m t h a t is l a r g e i n r e l a t i o n t o t h e m a r k e t , a n d f o r w h i c h i n t e g r a t i o n
p r o m i s e s l it tl e i n t h e w a y o f c o s t s a v i n g s , n e v e r t h e l e s s d i s a d v a n t a g e a c t u a l
a n d p o t e n t i a l r i v a ls - b e c a u s e t h e r e m a i n i n g m a r k e t is t o o s m a l l t o s u p p o r t
c o m p e t i t i v e s u p p l y a n d r i v a ls e x p e r i e n c e c o s t p e n a lt ie s s h o u l d t h e y p r o d u c e
t o t h e i r o w n n e e d s [ W i l l i a m s o n ( 1 9 7 4 ) - I . I n c i r c u m s t a n c e s , t h e r e f o r e , w h e r e
t h e p r e c o n d i t i o n s f o r s t ra t e g i c b e h a v i o r a r e s a ti sf ie d - n a m e l y , i n d o m i n a n t
f ir m s o r h ig h l y c o n c e n t r a t e d i n d u s t r ie s w h e r e t h e c o n d i t i o n o f e n t r y i s
d if fic u lt - d e c i si o n s t o in t e g r a t e c a n n o t b e a c c e p t e d w i t h e q u a n i m i t y b u t n e e d
a l s o t o b e a s s e s s e d w i t h r e f e r e n c e t o t h e i r s t r a t e g i c c o n s e q u e n c e s . T h e d i f f i -
c u lt c as e s, o f c o u r s e , a re t h o s e w h e r e v e r ti c a l in t e g r a t i o n e c o n o m i e s a n d
e n t r y im p e d i m e n t s a r e b o t h n o n - t r iv i a l . I n t e g r a t i o n , h o w e v e r , t h a t g i v e s r is e
t o n e g li g ib l e e c o n o n ~ e s ( m a y b e e v e n , i n c o n s i d e r a t i o n o f t h e a d v e r s e
i n c en t iv e a n d b u r e a u c r a t i c c o s t c o n s e q u e n c e s o f i n t e rn a l o r g a n i z a t i o n ,
d i s e co n o m i e s) a n d i s r e s p o n s i b l e f o r s e v e re e n t r y i m p e d i m e n t s is p l a in l y
p r o b l e m a t i c i f n o t o u t f i g h t a n t is o c i a l.
N o t e t h a t w e t r e a t a s s e t s p e c i f ic i ty a s b e i n g a ll o f a k i n d . I n f a c t, a ss e t
s p e c i f i c i t y t a k e s a t l e a s t f o u r d i f f e r e n t f o r m s : s i t e , p h y s i c a l , h u m a n , a n d
d e d i c a t e d a s s e t s [ W i l l i a m s o n ( 19 8 3) -I . T h e s e d i f f e r e n t f o r m s o f a s s e t s pe c'~ fic -
i ty , m o r e o v e r , h a v e s o m e w h a t d i ff e re n t r a m i f i c a t i o n s f o r t h e e c o n o m i c s o f
o r g a n i z a t i o n . T h e e m p i r i c a l t e s t s d i s c u s s e d b e l o w d o n o t m a k e t h e s e
d i s t i n c t i o n s a n d t h u s c a n b e f u r t h e r r e f i n e d .
T h e c r u d e a r g u m e n t i s i n s t r u c t i v e n e v e r t h e le s s . I t p r e d i c t s t h a t v e r t i ca l
i n t e g r a t i o n w i ll b e m o r e c o m m o n w h e r e ( 1) c o s t s a v i n g s t h a t a c c r u e t o a ss e t
s p e c i f i c i t y a r e g r e a t , ( 2 ) d e s i g n f e a t u r e s d e t e r a s s e t r e d e p l o y m e n t t o a l t e r n a -
t i v e u s e s , ( 3 a ) e c o i i o m i e s -
,~ s c a l e a r e s m a l l o r , ( 3 b ) a s a m o n g f i r m s o f d i f f e r e n t
s iz es , t h a t l a r g e r f ir m s w il l b e m o r e i n t e g r a t e d t h a n s m a l l e r , a n d (4 )
b u r e a u c r a t i c c o s t c o n s e q u e n c e s o f i n t e r n a l o r g a n i z a t i o n a r e le ss se v e re . T h c s e
a r e a l l p l a u s i b l e p r o p o s i t i o n s a n d a p p e a r t o b e c o n .~ o n a n t w i t h t h e d a t a -
-
7/27/2019 Asset Specificity and Economic Organization
12/14
376
M .H . Riordan and O.E. Williamson Asse t specificity and economic organization
al though these mat ters have only recent ly come under review and the data
need much more sys temat ic development . We never theless submit tha t
cerrob orat ive suppo rt for each of the prop osi t ions can be found - and in
some cases is bountiful . The following are i l lustrat ive:
(1 ) Forw ard in tegra tion ou t o f man ufac tu r ing in to d i s tr ibu t ion i s much
more common fo r durab le p roduc t s tha t r equ i re id iosyncra t i c knowledge o f
product at tr ibutes, in order effectively to sell and service an i tem. than i t is
for products which lack these features. Human asset specifici ty in sales and
service thus favors forw ard in tegra t ion ou t o f m anu factur ing in to dis t r i-
but ion. Am erican exper ience a t the turn o f the century ap pears to correspo nd
with th is predic t ion [P or t er and Livesay (1971) , Ch and ler (1977), W il liamson
(1985, ch. 5)].
(2) Rol l ing s tock that i s eas i ly redeployab le am ong shippers is ow ned by
carriers while that which is specialized to shipper needs and cannot be
redeployed except at great sacrif ice is owned by shippers [Palay (1984)]. This
is a lso consonant wi th the hypothesis .
(3) Casu al observat ion suggests, thoug h the data , to ou r know ledge, are
not very well developed in this respect , that larger f irms are more integrated
than smal ler riva ls . [See Mon teverde and Teece (1982) for supp ort in the
automobi le industry .]
(4) Social scientists hav e not given a great deal of at te ntio n to b ureau -
cratic costs. C om para tive assessments ar e especially few, w hich is especially
regrettable. 5 Alfred Ch an dle r has n evertheless inter prete d the shift from the
funct ional (or U-form) to the mul t id ivis ional (or M-form) organizat ion as
being dr iven in par t by the bureaucra t ic d is tor t ions in the former that are
alleviated by the lat ter . This is responsible for the M-form hypothesis: the
organization and operation of the large enterprise alon g the lines of the M-form
favors goal p ursu it and least-cost behavior m or e nea rly associated with the
neoclassical pr ofit maximization hyp othe sis than do es the U-form organiza-
tional alternative
[W il l iam son (1970 , p . 134)] . Al thoug h the evidence is not
extensive , i t appears again tu be broadly corroborat ive [Armour and Teece
(1978), Steer and Cable (1978)].
We conc lude wi th a cavea t : the a rgument th roughout has emphas ized
polar f irm and market choices. This facil i tates the analysis , but i t ignores an
im portan t c lass of hyb r id m odes of organ izat ion - of which jo in t ventures ,
f ranchis ing, and a var ie ty of complex forms of re la t ional contra c t ing are
examples. R ecent studies of econo mic or gan izatio n disclose th at these hy brid
modes a re much more impor tan t than had h i the r to been rea l i zed [MacNed
5 T he so c i o l o g y li te r a tu re o f t en d o cu m en t s m an ag e r i a l d i s c r e ti o n , b u t r a r e l y i n a co m p ara t i v e
ins t i t u t iona l way . [An example is Da l ton 1959) .] Th us i f a l l fo rm s of org aniz a t ion a re subjec t t o
ident i ca l d i s tor t i on s in re l a ti on to a hyp othe t i ca l idea l , t hen no ne a f ford ~e li ef . Di s tor t i on s th a t
a re i r remediab le l ack com para t ive ins t i t u t i ena l s ign i f icance .
-
7/27/2019 Asset Specificity and Economic Organization
13/14
M .H . Rior dan and O.E. Will iamson As set specif ici ty a nd economic organization
377
1974) , G old be r g 1976) , K le in 1980), Jo sko w 1985), W i l li am son 1985) ] .
Fu tur e de sc r ip t ive , theor e ti ca l, an d e m pir i c a l s tud ie s o f e c on om ic or gan iz a-
t i o n w i l l p r e s u m a b l y m a k e m o r e a d e q u a t e p r o v i s i o n f o r t h e s e h y b r i d m o d e s .
References
Alchian, A rme n, 1984, Specif ici ty, specializat ion, and coal i t ions, Jou rnal of Inst i tut ional and
Th eoret ical Eco nom ics 140, 34-49.
An derson, Erin an d D avid Schrai tt le in, 1984 , Integra t ion o f the sales force: An empirical
examina t ion , The Ran d Journa l o f Econom ics 15, 385-395.
Aoki, M asahiko , 1984, The coopera t ive gam e theo ry c f the f i rm (Oxford U nivers ity Press,
London) .
Arrow, K enneth , 1985, Informat iona l s t ruc ture of the f i rm, A mer ican E conom ic Review 75, 303-
307.
Ben-Pora th , Yoram , 1980, The F-connec t ion: Fami li es , f ri ends, an d f irms and theo rgan iza t io n of
exchange, Populat ion and Development Review 6, 1-30.
Cha ndler , Alfred, 1966, Strategy and s t ructu re (Dou bleday, Ne w Y ork).
Chan dler , Alfred, 1977, Th e vis ible ha nd (Belkn ap Press , Cam bridge) .
Da l ton, M elvi lle, 1959, M en w ho m ana ge (Wiley, New Y ork).
Goldberg , Vic tor, 1976, Tow ard an expand ed econom ic theory o f cont rac t , Journa l o f Econom ic
Issues 10, 45-61.
Grossm an, Sanford and Ol iver Har t , 1984, The cos ts and benef it s of own ershi [ A theo ry of
ver tical integrat ion , Unp ubl ished m anu scr ipt (Un iversi ty of Chicago, Chicago, IL) .
H ayek , Fr iedr ich, i~57, Studies in ph i losophy, poli tics, and econ om ics (Rou t ledge and Ke gan
Paul , London) .
Joskow; Pau l , 1985, Vertical integra t ion an d lo ng term co ntracts : The case of coal burn ing
electric genera t ing plants , Jou rna l o f Law~ Economics, and O rganiza t ion 1, 25-64.
Joskow , Pau l an d Rich ard Schmalensee, 1983, l~l[arkets for pow er (M IT Press , Camb ridge, M A).
Klein, Benjamin, 19 80, Tran sact ion cost determ inan ts for unfair' contrac tual arrangem ents ,
Am erican Eco nom ic Review 70, 356-362.
Klein, Benjamin, Ro bert C rawford an d Arm en AIchian, 1978, Vertical integrat ion, approp riable
rents , and the compet i t ive contract ing process , Journal of Law and Economics 21,297-326.
MacNeil, Ia n, 1974, Th e ma ny futures of contracts , So uther n Ca l i fornia Law Review 47, 691-
816.
M asten, Scott , 198 2, Tra nsa ction costs, insti tution al choice, and the th eor y of the f~.~m,
Un publ ished h.D . disser tat ion (Un iversi ty of Pennsylvania, Philadelphia, PA).
M asten, Scot t, 1984, The organizat ion o f product ion: Ev idence from th e aerospace industry,
Journa l o f Law and Econom ics 27 , 403-418.
M onteverde , K irk a nd Da vid Teece, 1982, Suppl ier switching c os:s and vert ical integrat ion in
the autom obi le indus t ry , Bell Journa l of E conom ics 12, 206-213.
Palay, Thom as, 1984 , Co mp arat ive inst i tut ional economics: Th e go vernan ce of rail f reight
contract ing, Jou rnal of Legal Studies 13, 265-288.
Palay, Thom as, 1985, Th e avoidan ce of regulato ry constraints: Th e use of informal contracts , Jou rnal
of Law, Economics, and Organizat ion 1, 140-162.
Pol lak , Rober t , 1985, A t ransac tion cos t app roach to households , Journ a l of Econom ic Li te ra ture 23 ,
581-608.
Por te r , G lenn an d Ha rold Livesay , 1971 , M erchants and man ufac turers ( Johns H opkins
University Press, Baltimore, MD).
Stuckey, Joh n, 1983 , Vert ical integrat ion a nd joint ventures in the internat ional alum inum
indus t ry (Harvard Univers ity Press , C ambr idge , M A) .
Walker , G ord on and D avid Weber, 1984, Transac t ion cos t approach to com ponent mak e or
buy decis ions, Ad minist rat ive Science Q uarte r ly 29, 373-391.
Wil liamson, O l iver , 1970, Co rpo rate con trol an d business behavio r (Prentice-Hall , Eng lewoo d
Cliffs, N J).
Wil liamson, O l iver , 1971, The ver tical in tegrat ion of product ion: M arke t failure considerat ions,
Am erican Ec ono m ic Review 61, 112-123.
-
7/27/2019 Asset Specificity and Economic Organization
14/14
378
M.H. Riordan and O.E. Williamson Asset specificity and economic organization
W i ll iam so n , O l iv e r , 1 9 7 5 , M ark e t s an d h i e ra rch ie s : A n a y s i s an d an t i t ru s t i m p l i ca t io n s (F ree
Press, New York).
W i ll iam so n , O l i v e r, 1 9 7 6 , F ran ch i se b i d d i n g fo r n a t u ra l m o n o p o l i e s - i n g en e ra l an d w i t h
respec t t o CA TV , Bell Jou rna l o f Econ om ics 7 , 73-104 .
W i ll i amson, Ol iver , 1979 , Tra nsac t ion-co s t economics : Th e go vern ance of c~n t rac tu a l re l a t ions ,
Jo u rn a l o f L a w a n d E co n o m i cs 2 2, 2 33 -2 6 1.
Wi ii iam.~on, Ol iver , 1983 , Credib le com mi tm ent s : Using ho s t age s to sup por t excha nge , Am erican
Eco nom ic R eview 73 , 519-540 .
W fl l iamson, Ol iver, 1985, Th e cc,ono~ - ~ t it u t ions of cap i t a l i sm (Free Press , Ne w York) .