Download The Costs of Organization

The Costs of Organization
Masten, Meehan & Snyder 1991 Journal of Law,
Economics & Organization 7(1): 1-25
Jeff Savage
Theory
• Firms internalize operations to mitigate imperfect contract problems due
to uncertainty, bounded rationality and opportunism.
– However, when firms attenuate the residual claimant status of
upstream transactors, they sacrifice the high-powered incentive
advantages of market exchange; this demands greater investment in
monitoring and administration.
• In the past, theorists hadn’t paid attention to factors which influence the
level of these internal organization costs.
– The authors show whether and to what extent variations in internal
rather than market organization costs are responsible for observed
variations in organizational form.
Setting—Naval Construction
• Construction (as opposed to manufacturing) involves building of a single
or small number of finished units.
• Asset Specificity is lower—capital & equipment is less specific to a
particular transaction.
• The unique design & location of construction projects limits the ability to
hold inventories of work in progress.
– Thus, temporal specificity* may be an important source of holdups.
Results
Results cont.
Summary
• The results support some but not all of the standard transactioncost arguments.
• Temporal Specificity Can be a major determinant of organization
form.
– The prospect of holdups (where timeing of performance is
critical) represents a significant hazard of contractual exchange.
• What other industries might be characterized by temporal
specificity holdup problems?
Discussion
• How distinct are internal and market organization
costs?
• Now that we are looking at internal organization
costs, what effect would forming a labor union have
on a firm? On an industry?
– How does this paper connect with the Argyres
and Liebeskind 1999 paper? Ouchi 1979?
• In summary, it is important to look at both the
internal organization costs, as well as the market
transaction costs when we are analyzing the
integration decision.