Transactions costs approaches Flashcards
Intro?
Direction of travel
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Neo-classical perspectives
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Coase and firms emergence
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Williamson markets v hierarchies
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Links to structure
Neo-classical perspectives?
Price, certainty and costless info
Firm a production function turning inputs to outputs to profit max
Entrepreneur is owner - perpetual succession, shares transferability, incorporation association, limited liability
Neo-classical adequate until rise of joint stock firms?
Firms long lived, self perpetuating
- Neo classical doesn’t become enough
- doesn’t tell us ab internal features, organisational forms, factors contributing to emergence, evolutionary factors, governance factors, links between structure and outcomes
- why do we have firms?
Coase nature of the firm?
- looks at question of why people choose to organise themselves in business firms rather than each contracting out for themselves
- firm seen as a system of relationships coming into existence when the direction of resources is dependent on an entrepreneur
- firm as a coordinator and panners
- undertakes tasks similar to market
“The main reason why it is profitable to establish a firm would seem to be that there is a cost of using the price mechanism”
Coase - costs?
- contract termination and starts
- contracts covering all contingencies
- problems of seeking solutions when contracts infringed
- opp cost of time finding right market p – search costs
- negotiating for marginal change
- uncertainty
- when transaction costs of using market greater than admin, costs of internalisation = firm
Coase - coexistence?
- Internalisation may give no cost savings
- decreasing returns to entrepreneurship
- then transaction costs might det size, distribution of firms
- firms arise bc of efficiency gains
Williamson?
- not just technology but human and environment factors that create hazardous exchanges and determine form/structure of organisation
- humans – bounded rationality and opportunistic behaviour
- dep on 3 critical dimensions of transactions – asset specificity, uncertainty, frequency – higher levels result in firms not markets
Williamson - sources of transaction costs?
Bounded rationality
uncertainty/complexity
information impactedness
opportunism
small numbers
Bounded rationality? - Williamson
Capacity of people to form and solve complex problems limited
Particularly in environments characterised by uncertainty
Cognitive limits, imperfect information, time constraint
Satisficing
Sub-optimal decisions
Opportunism? - Williamson
- self interest seeking w guile
- not universal but diff to identify poor quality traders – info issues
- less a problem w large no traders due to reputation – lots of market reference points – if bad to a client, customer will simply go elsewhere, seller won’t want this
- more problem w small numbers exchange – here may be willing to pay more to check quality of goods
Atmosphere - Williamson?
- participants may value a particular mode of transaction
- some may value being in a peer group or being self employed and want higher compensation for becoming an employee
- society may influence transactions
Fundamental transformation? - Williamson
- learning by doing
- experience may lead to a situation of large numbers exchanges becoming small numbers exchange
- expertise whittles down – can start increasing price as few other places for customers to go
- research contracts?
- repeat tenders?
- FMA
Critical dimensions - Williamson?
- level of transaction costs
- asset specificity – high -> cost of market transactions higher -> more scope for opportunism
- uncertainty
- frequency – fixed costs of governance structures that we develop, internalisation worthwhile if transaction quite frequent
Williamson - asset specificity 1?
Relationship specific asset reflects an investment made to support a given transaction
Cannot be easily redeployed without some sacrifice to the productivity of the asset or need to adapt to new use
May give rise to opportunism
e.g., plastic mould
Williamson - asset specificity 2?
Site specificity - steelmaking, adjacent facilities, scope economies
Physical specificity - physical properties tailored to one set of transactions
Dedicated assets - investment made with respect to one buyer, specialised handling equipment at ports
Human asset specificity - specific versus general skills, former worth more in context of one set of transactions than elsewhere
Williamson - asset specificity 3?
Widgets for GE Turbines
We can make at a rate of 1000 pa
Variable cost C
Investment I (fixed annual payment associated with factory development)
TC = I -1000C
If we fail with GE can sell on the market = 1000Pm
Pm>C get profit 1000(Pm-C)
But I>1000(Pm-C) no profits
If Pm > C so price covers variable cost, get 1000(Pm-C).
But if I>1000(Pm-C) you wont cover your investment if you have to go to the market not GE.
Then I-1000(Pm-C) is relationship specific investment or the amount of my investment I don’t get back if we don’t do work for GE
So if I = 8500 C =3 and Pm=4 then RSI = 8500-1000 (4-3) =7500. Of your investment you lose most of it if you don’t do business with GE
Assume prior to build GE agree to buy 1000 at P* whereP>P. Then if I<1000(P-C) our rent is 1000(P-C)-I if we go ahead and they buy from us i.e. we get a profit).
But if you build and then GE default. You would still sell on the market even with accounting losses, because of issue of sunk costs 1000(Pm-C)>0.
Quasi rent is difference between rent from GE and next best alternative[1000(P-C)-I] – [1000(Pm-C)-I] = 1000(P*-Pm)
Quasi rent the extra profit we get if the deal go ahead as planned
Then quasi rent = likely scale of the hold up problem. Also potential for GE to get a chunk of our rent through renegotiation.
Asset not relation-specific, quasi rent is zero, but in many cases quasi rent is positive.
Quasi rent is large trading partner could exploit through hold up (holds up trading partner by trying to renegotiate at t+1, and where contracts incomplete)
