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By virtually any measure, Oliver Williamson has been one of the most influential scholars in the economic organization and institutions. He is widely credited (including by Ronald Coase himself) with rescuing transaction cost economics from its tautological origins by showing how the advantages and liabilities of alternative organizational arrangements could be related to features of transactions in a way that allowed refutable hypotheses to be generated and tested. In doing so, Williamson opened the door to the systematic investigation of a host of organizational problems that had previously resisted economic analysis. Though firmly rooted in economics, Williamson’s scholarship drew on and had a tremendous influence on law, political science, and organization theory. Indeed, there is hardly a niche in the social sciences that has not been affected in some way by Williamson’s writings. In this essay, I try to convey some of the personal and professional qualities of Oliver Williamson drawn from recollections of my relationship with him over the years.

Author(s): Barnett, Jonathan; Baye, Michael R; Cooper, James C; Crane, Daniel A; Elzinga, Kenneth G; Epstein, Richard; Garza, Deborah; Hazlett, Thomas W; Hurwitz, Justin Gus; Klein, Benjamin; Klick, Jonathan; Lambert, Thomas A; Lipsky, Tad; Manne, Geoffrey A; Masten, Scott E; Ohlhausen, Maureen; Rill, James; Rybnicek, Jan; Smith, Vernon L; Teece, David; Willig, Robert; Wright, Joshua D; Yun, John M

In the standard durable-goods-quality model (e.g., Klein and Leffler, 1981; Shapiro, 1982, 1983), the prospect of repeat sales is often adequate to support the provision of high-quality durable goods even when quality is not observable at the time of purchase. We show that when durable goods require costly post-sale service, a reputational equilibrium may not exist at any price, even with a flow of profitable new sales indefinitely into the future. More generally, we characterize the size of the premium needed to make promises to provide post-sale service self enforcing. We then apply the model to United Shoe Machinery, IBM, and Xerox, using historical records to estimate the self-enforcing post-sale service premia that would have been necessary for each of these companies.

Unlike other public utilities, most water in the United States is supplied by publicly owned and operated waterworks. The predominance of the public sector in the supply of water was not always the case, however; private firms dominated US water supply throughout most of the 19th century. This article analyzes the puzzle of why water and sanitation systems were the only major utilities to become predominantly public by, first, reexamining historical accounts of the problems of contracting for water services in light of modern theories of economic organization and, then, evaluating hypotheses derived from those accounts using data on 373 waterworks serving US municipalities with populations over 10,000 in 1890. Among other results, municipal ownership is found to be related to the distribution of population and commerce within a city in ways that suggest that frictions between cities and private companies over system extensions and improvements played a significant role in the shift to municipal ownership. The Author 2010. Published by Oxford University Press on behalf of Yale University. All rights reserved. For Permissions, please email: journals.permissions@oxfordjournals.org, Oxford University Press.

This paper considers a class of contracts in which parties write detailed, long-term performance obligations yet leave one or both parties broad discretion to terminate the agreement on short notice with little or no penalty. If the purpose of formal contracting is to make agreements legally enforceable, why would transactors go to the trouble of specifying complex price and performance obligations that either party can walk away from at will? The paper shows that formal contracts may be valuable, even where termination is the only sanction available to the parties, as a way of economizing on the cost of determining prices for a series of heterogeneous transactions. The theory is then used to analyze the structure of contracts between freight carriers and drivers and, in particular, the means by which haul prices are determined. Both the overall structure and pricing arrangements in these contracts support the proposition that ex post bargaining costs can affect the use and design of contracts even in the absence of significant relationship-specific investments.

In the main, empirical research is regarded as subordinate to theory. Theorists perform the difficult and innovative work of conceiving new and sometimes ingenious explanations for the world around us, leaving empiricists the relatively mundane task of gathering data and applying tools (supplied by theoretical econometricians) to support or reject hypotheses that emanate from the theory. To be sure, facts by themselves are worthless, “a mass of descriptive material waiting for a theory, or a fire,” as Ronald H. Coase (1984 p. 230), in characteristic form, dismissed the contribution of the oldschool institutionalists. But without diminishing in any way the creativity inherent in good theoretical work, it is worth remembering that theory without evidence is, in the end, just speculation. Two questions that theory alone can never answer are: First, which of the logically possible explanations for observed phenomena is the most probable? And second, are the phenomena that constitute the object of our speculations important? Modern empirical research on the firm, which dates to Kirk Monteverde and David J. Teece’s articles examining automotive procurement (1982a, b), is now substantial. Rather than try to summarize or discuss particular results of that literature, for which there are already several excellent surveys (the most recent of which is that of Christopher Boerner and Jeffrey Macher [2001]), my aim in the following is to comment more generally on the overall state of knowledge, particularly, the lessons that can be gleaned from the empirical literature about the relative usefulness of transaction-cost and agency theories of the firm and about the value of continued research on economic organization.

At a very broad level, firms and municipalities share a number of features. Among other things, both are self-governing entities that make investments and purchase, produce, and distribute goods and services, sometimes, but not always, for an explicit price. Yet towns and firms are perceived as being governed differently: Whereas municipalities are governed democratically, the archetypal firm is viewed as an autocracy. The sharp contrast conventionally drawn between “autocratic” firms and more “democratic” entities like towns and cooperatives is misleading, however. As Henry Hansmann (1988) has pointed out, traditional business corporations are, in essence, lender cooperatives, organizations over which investors exercise democratic control. From this perspective, the issue becomes less one of whether communities or enterprises are democratically governed but who gets to vote. Because some means of arriving at collective decisions (i.e., voting rules) will be needed regardless of which group of patrons is in charge (the exception being single-owner enterprises such as sole proprietorships), whether it is better to assign control to one set of patrons instead of another − or possibly to share control among two or more patron classes − will depend, in part, on the benefits and limitations of collective decision making and how those vary with the attributes of patrons and transactions. In this analysis, the predominance of investor democracy among commercial enterprises is the result of generally greater hazards of contracting for capital than with input suppliers, workers, and customers combined with arguably greater difficulties of the latter three groups in exercising effective collective control (Hansmann 1988: 277−284, 301; Williamson 1987).

This article reexamines the administered contracts approach to regulation in light of recent empirical research that establishes the importance of transaction-costs in the organizational choice and design decisions. After reviewing the fundamentals of transaction cost reasoning and the franchise bidding-versus-regulation debate, the study surveys the empirical literature on franchise bidding, contracting, and vertical integration. The implications of transaction-cost theories for current policies toward pubic utility regulation and deregulation are also addressed.

This paper analyzes the role of financial aid coordination among the group of top northeastern colleges and universities known as the Overlap Group. Members of the Overlap Group met annually to tailor financial aid packages so that the out-of-the pocket contribution of parents to their children's education was the same regardless of the school the students chose to attend. I argue that the practices and stability of the Overlap Group are difficult to reconcile with traditional cartel theory and that financial aid coordination was a solution to organizational problems encountered in the education industry, particularly, to matching and externality problems arising in the allocation of elite students among educational institutions.

The authors, one an ethicist and the other an economist, look at the issue of free trade with Mexico and other low wage rate countries from the viewpoints of their disciplines. The conclusion of the paper is that these disciplines differ on their priorities and analytical methods, not on their objectives.

Impersonal exchange has been a major driver of economic development. But transactors with no stake in maintaining an ongoing relationship have little incentive to honor deals. Therefore, all economies have developed institutions to support honest trade and realize the gains of impersonal exchange. We analyze the relative capacities of communities (or social networks) and courts to secure cooperation among heterogeneous, impersonal transactors. We find that communities and courts are complementary in the sense that they tend to support cooperation for different sets of transactions but that the existence of courts weakens the effectiveness of community enforcement. By relating the effectiveness of enforcement institutions to changes in the cost and risks of long-distance trade, driven in part by improvement in shipbuilding methods, our analysis also provides an explanation for the emergence of the medieval Law Merchant and its subsequent supersession by state courts.

A LTHOUGH United States v. United Shoe Machinery Corporation ranks among the most famous of antitrust cases, the economic principles involved in the dispute have remained obscure.' The most prominent economic issues have been (i) the role of leasing as a solution to the durablegoods-monopoly problem and (ii) the exclusionary potential of specific lease provisions. Of these, the durable-goods-monopoly rationale appears to have gained the greater acceptance among economists-an occurrence due in no small part to Chicago School arguments that challenged the logic of anticompetitive exclusion.2

This chapter discusses the logic, hypotheses, empirical methods, and principal findings of the transaction-cost approach to economic organization as a foundation for analyzing the organization of agricultural transactions. In contrast to textbook characterizations of agriculture as the quintessential spot market, agricultural transactions display a broad range of governance arrangements. The chapter traces the use of these arrangements to the location-specific nature of investments and, especially, to temporal specificities associated with the perishability of many agricultural products. Case studies of the governance of fruit, vegetable, and dairy processing; the emergence of multinational firms in the banana trade; the evolution of contractual relations between tuna harvesters and processors; and the governance of transactions between cattle feedlots, slaughtering, and beef fabrication operations illustrate the arguments.

This paper considers functions of contracting other than the protection of relationship-specific investments and the provision of marginal incentives, and applies the theory to explain variation in the form of compensation of over-the-road truck drivers in the U.S. Specifically, we argue that contracts in this industry serve to economize on the costs of price determination for heterogeneous transactions. We show that the actual terms of those contracts vary systematically with the nature of hauls in a way that is consistent with the theory. By contrast, we find that vehicle ownership, which defines a driver's status as an owner operator or company driver, depends on driver, but not trailer or haul, characteristics.

This paper considers functions of contracting other than the protection of relationship-specific investments and the provision of marginal incentives, and applies the theory to explain variation in the form of compensation of over-the-road truck drivers in the U.S. Specifically, we argue that contracts in this industry serve to economize on the costs of price determination for heterogeneous transactions. We show that the actual terms of those contracts vary systematically with the nature of hauls in a way that is consistent with the theory. By contrast, we find that vehicle ownership, which defines a driver's status as an owner operator or company driver, depends on driver, but not trailer or haul, characteristics.

This paper explores the functions and limitations of democratic governance by analyzing the allocation of decision-making authority in colleges and universities. Contrary to the conventional perception that large numbers and heterogeneity of voters and issues undermine the efficiency of democratic decision making, data on the allocation of authority for thirty-one decision areas in 826 US colleges and universities show democratic governance to be more prevalent in larger, “full-service” research universities than in smaller liberal arts colleges and special-curriculum institutions. State- and church-affiliated institutions, meanwhile, tend to be governed more like firms. The results overall are consistent with economic theories of political organization that view democratic governance primarily as a means of enhancing the credibility of commitments rather than as a method of aggregating preferences. “Educational systems, like governments, apparently can never be rational, never a logical and economical means to a definite end. Rather must they be always makeshifts.” —J.P. Munroe (1899) “Never did a dean lack legitimate reasons by which to color his bad faith” —Machiavelli, The Dean (1513)

Given their potential to affect contract law, antitrust policy, and business practice, it is important that theories of contracting stand on an empirical footing as solid as possible. This article reviews the empirical literature on contracting with emphasis on the relative contributions of agency and transaction cost theories. After describing their common underlying structure, we discuss the theories' testable implications and the associated econometric evidence. Of the two, transaction cost economics has had more success both generating predictions and explaining contracting behavior., Parce qu'elles sont susceptibles d'influer sur les législations contractuelles, les politiques et les pratiques industrielles, il est important que les théories des contrats se basent, autant que possible, sur des travaux empiriques solides. Cet article fait un bilan de ces études en insistant plus particulièrement sur les contributions de la théorie de l'agence et de la théorie des coûts de transaction. Après une brève présentation de ces approches théoriques, nous discutons des propositions testables qu'elles génèrent et des résultats des travaux économétriques sur le sujet. Des deux, la théorie des coûts de transaction est celle qui a eu le plus de succès pour générer des propositions et expliquer les comportements contractuels., Masten Scott E., Saussier Stéphane. Econometrics of Contracts : an Assessment of Developments in the Empirical Literature on Contracting. In: Revue d'économie industrielle, vol. 92, 2e et 3eme trimestres 2000. Économie des contrats : bilan et perspectives, sous la direction de Éric Brousseau et Jean-Michel Glachant. pp. 215-236.

In “The Nature of the Firm,” Ronald Coase posed three questions essential to understanding the role of the firm in economic organization. The first, and most basic, is what is a firm, or more precisely, what are the properties that distinguish organization within a firm from market exchange? The second concerns the determinants of firm size or “Why,” in Coase’s words, “does the entrepreneur not organize one less transaction or one more?” (1937 [1991, p. 23]). Finally, noting that “nothing could be more diverse than the actual transactions which take place in our modern world,” Coase sought to explain how the attributes of transactions affect the relative costs of internal and market organization (1937 [1991, pp. 24–25]).

This chapter reviews the approaches used in strategic management and economics to assess the normative validity of business decision rules, that is, whether prescribed strategies and practices are likely to lead to superior performance. While economists tend to assess theories of business behavior in terms of their predictive ability, the success of a theory in predicting managerial behavior tells us little about that theory’s value as a normative guide to business decision making. The strategic management research relating strategic and organizational choices to firm performance generally fails to account for the systematic selection of strategies and organizational forms, however. To the extent the strategies and organizational forms managers adopt reflect expected performance, least squares estimates of the relation between firm behavior and performance will be biased. The chapter discusses procedures for correcting selection bias and reviews a pair of recent empirical studies that illustrate its importance.

Reading the above quotations, one might reasonably conclude that no progress at all had occurred in the development and testing of transaction cost arguments in the interval between Fischer’s and Simon’s appraisals. But while Fischer may have been justified in his criticism, Simon clearly is not. Economists’ initial pessimism about the prospects for deriving testable implications from transaction cost reasoning has turned out to be grossly misplaced. Theoretical advances beginning in the 1970s spurred a profusion of empirical research that continues unabated. As recent surveys amply document (see Joskow, 1988; Shelanski, 1992; Crocker and Masten 1994), “the research that must be performed to estimate the exogenous parameters and to test the theory” is well underway.

THE interface between successive stages of production is frequently governed by contractual agreements, and the efficiency of such arrangements has been the subject of considerable attention in the economic literature. But production is organized administratively within firms as well as contractually between them, and given the practical limitations of bureaucratic organization, the relevant question can be seen to be not merely whether contractual deficiencies exist but how severe such deficiencies may be relative to the alternative costs of organizing production internally. The important issue from an institutional choice perspective thus becomes how the particular details of a transaction affect the differential efficiency of alternative organizational forms. Recent theoretical work has sought to identify such relationships.' In particular, the choice between internal and external organization and, in the event of the latter, the choice of contract terms have been related to several critical parameters of the transaction. This paper presents some

Recent refinements in the theory of the firm suggest that organization form may be sensitive not only to the degree to which assets are specific to a transaction but also to the type of capital employed. This paper reports evidence regarding the relative influence of transaction-specific investments in physical and human capital on the pattern of vertical integration using new data obtained directly from U.S. auto manufacturers. The results support the proposition that investments in specialized technical know-how have a stronger influence than those in specialized physical capital on the decision to integrate production within the firm.

In this article we consider the ways in which the desire for efficient, low-cost adaptation to change influences the tradeoff between the design and duration of long-term contractual relationships. We examine the distortions in contract terms occasioned by nonprice competition for natural gas in the presence of wellhead price regulation. Deviations from optimal contract incentives significantly raise the cost of being bound to long-term agreements and shorten the duration of contracts. The approach we adopt suggests a method for empirically assessing the efficiency of alternative contracting practices and legal standards.

Fifty years after the publication of Ronald Coase's seminal deliberations on the subject, economists have yet to reach a consensus on the nature of the firm. While many continue to regard the firm as a distinct institution, usually ascribing to it some superior control, information, or adaptive properties, others reject the notion that any unique governance advantages accrue to integration, noting that neither human nature nor technology or information are altered by the purely nominal act of "internalization." For the latter, the word firm is merely descriptive, a collective noun denoting a particular cluster of otherwise ordinary contractual relationships. The purpose of this article is not to offer another theory of vertical integration but rather to explore in more depth the logically antecedent question of whether it even makes sense to talk about the firm as a distinct organizational form. Specifically, is there a basis for associating special properties with internal organization, or is the designation firm really just descriptive of a set of commonly observed but otherwise unexceptional contractual relationships? After briefly reviewing key elements of the controversy, I argue that the answer to this question lies in an examination of the broader legal and po

This paper examines the efficiency implications of minimum bill cont racts, and concludes that minimum bill provisions promote rather than impede efficient adaptation to changing circumstances. In particular , minimum bills provide a simple mechanism by which parties faced wit h uncertain demand and rising marginal cost can approximate joint-pro fit maximizing payment schedules in transaction-specific relationship s governed by long-term contracts. The paper also questions the merit of proposals for legislative or regulatory intervention to reduce mi nimum bill obligations in natural gas contracts, and considers the ap propriate legal status of these provisions in the event of contractua l failure. Copyright 1988 by Blackwell Publishing Ltd.

A vast body of economic theory is concerned with the way in which parties design contracts to align incentives and promote efficient exchange.' An alternate view, however, ascribes to contract design a more sinister purposethat of excluding or otherwise disadvantaging rival firms.2 Although the latter argument has tended to target a specific set of suspect practices such as tie-in and exclusive dealing arrangements, recent efforts have begun to associate strategic objectives with more conventional pricing and incentive terms in contracts, including such common provisions as multi-part pricing schedules3 and stipulated damages clauses.4 In the course of developing and applying the antitrust laws, the courts have analyzed the effects of various contractual provisions on competition. The resulting body of law recognizes that contracts have the potential to exclude competitors but also that exclusion can serve efficiency purposes.5 The broadening of exclusion claims to include the strategic use of common contractual designs, and the corresponding potential to challenge a widely used class of contractual arrangements on antitrust grounds, stand to complicate rule-of-reason analyses of anticompetitive exclusion and raise