Lecture 4

Question 1

Coase 1937

Answer 1

main reasons why it´s profitable to establish a firm is due to the cost of using the market - price mechanism

Question 2

Transaction costs

Answer 2

search cost (discovering what the relevant prices are and comparing those to look for best offer)
go to diff. markets to get what you want (credit, labour market, raw materials/goods, transportation
negotiating & concluding a separate contract for each transaction which take place in the market
renegotiation - new action implies new terms (i.e each time a change in market/techn. conditions made profitable change in the activity undertaken)
writing the contract (lawyer - even if workers are doing the same task)
time-costly in the long-run
idyosyncratric contact may run out and thus one has to start again

Question 3

Firms - Long term contracts

Answer 3

these are preferred for supply as they reduced the cost of making ST contracts several times owing to the risk attitude of people concerned
difficulty in forecasting makes writing the contract harder (increase cost as one has to keep rearranging the contract)

Question 4

Firms

Answer 4

standarised contracts(reduce level of renegotiation)
lower search cots (people send applications)
generalisation of terms (open ended in terms of task,expectations) - all have the same contract
long-term - no need to renew
same contract for suppliers with st. set of rules/procedures for getting (e.g. RM) when/wherever you needed
in terms of uncertainty (diff. of forecasting) make it easier to have general terms

Question 5

E-E relation contract

Answer 5

owner is given the authority do direct the employee by guaranteeing the later a fixed wage and certainty
but he obeys directions of the entrepeneur within certain limits (not see it as Marx - explotation)
which is stated in the contract

Question 6

Criticism to Knight

Answer 6

sell service to market (consulting)
authority and legal RS instead of absence/present of fixed wage
better judgement doen´t necessarily imply power
no reasons for PM substitution
power/direction issues

Question 7

limits to firm Coase

Answer 7

Dm to manager
Entrepeneur fails to place factors of production in uses where value is greatest - loss of wasted resources
supply price in organising ability increases as firm size increases - men prefer to be heads of small independent firms rather than heads of departments in large business (hierarchy)

Question 8

Williamson 1937

Answer 8

not every transaction fits comfortably within classical contracting scheme

Question 9

Asset Specificity

Answer 9

capital good to a narrow purpose
single function
limited uses because of some inherent restriction
little value outside the contract (hold up problem)
more important to keep trade with that customer so take place outside

Question 10

Relational Contract

Answer 10

set up by institution (2 types)
idysincratic & recurrent - worth to set up to institution & vulnerable to post contractual opportunism because of uniqueness
set up a contract between 2 parties allocating authority

Question 11

Market governance

Answer 11

main governance structure
non-specific transactions of both occasional and recurrent contracting
consult own experience in deciding to continue trading or not
since standarised - alternative supply/purchase arrangements are possible
standarised kind of experience

Question 12

Market Failure - Williamson

Answer 12

difficulty in enforcing contract in the presence of uncertainty
one will know there exists a risk and behave oppotunistically one contrat have been signed and take advatage
other party may fear and thus not decide to enter thought may be happier if they did

Question 13

Firms essence

Answer 13

solution to asset specificity and difficulty of making credible commitment not to hold up

Question 14

Hold up problem

Answer 14

the more specific the more market power the other party would have
owner of specific asset is vulnerable to hold up (marx - alienation)

Question 15

Trilateral Governance

Answer 15

doesn´t directly required creation of institution so do it through jurisdiction
3rd parties decide who´s right 6 who should do what in case of conflict

Question 16

Limits of Firm Size

Answer 16

EoS isn´t only key driver for size
costs (organisation, transaction, coordination, communicate over large company)
two forces affect size in opposite directions will lead to optimal firm size (Coase)

Question 17

Coase´s view

Answer 17

first who notice than firm isn´t merely just a function of production
focuses of transaction cost (cost of production) and coordinating cost (technical problems arising from coordinating, communicating effectively)
ignores cost of organisation (managerial cost (Agency cost, team production, managerial behaviour, incentive problems)

Question 18

vertical integration

Answer 18

decreases supply chain of having many individual independent agent contracts (diff. suppliers) but rather reduce length and thus reduce T.C

Question 19

Specialisation & cost of organisation

Answer 19

as firm size increases - breaking down firm in smaller will be more cheaper to run due to lower cost of organisation
(3d or additive printing vs. traditional methods)

Question 20

difference Coase and Williamson

Answer 20

C: Firm only differs from market in terms of modes of coordination whereas W. goes deeper and say they are structurally different (governance structures)
C. doesn´t specify abut diff. types of products or opportunism

Question 21

Transaction Cost Williamson

Answer 21

W. explains C idea in terms of governance structures depending on HAS of transaction
different mode to allocate transactions resources & deal with cost

Question 22

HAS - cost

Answer 22

complexity increases of asset –> fewer suppliers will be able to produce it
reduce risk that external suppliers won´t be able to produce it (which can be very costly) if firm decides it to produce inside