Firm Resources and Sustained Competitive Advantage

Traditional econometric models assume a constant one-period forecast variance. To generalize this implausible assumption, a new class of stochastic processes called autoregressive conditional heteroscedastic (ARCH) processes are introduced in this paper. These are mean zero, serially uncorrelated processes with nonconstant variances conditional on the past, but constant unconditional variances. For such processes, the recent past gives information about the one-period forecast variance. A regression model is then introduced with disturbances following an ARCH process. Maximum likelihood estimators are described and a simple scoring iteration formulated. Ordinary least squares maintains its optimality properties in this set-up, but maximum likelihood is more efficient. The relative efficiency is calculated and can be infinite. To test whether the disturbances follow an ARCH process, the Lagrange multiplier procedure is employed. The test is based simply on the autocorrelation of the squared OLS residuals. This model is used to estimate the means and variances of inflation in the U.K. The ARCH effect is found to be significant and the estimated variances increase substantially during the chaotic seventies.

Autoregressive conditional heteroscedasticity with estimates of the variance of United Kingdom inflation

In this article we offer a view that suggests that a firm's critical resources may span firm boundaries and may be embedded in interfirm resources and routines. We argue that an increasingly important unit of analysis for understanding competitive advantage is the relationship between firms and identify four potential sources of interorganizational competitive advantage: (1) relation-specific assets, (2) knowledge-sharing routines, (3) complementary resources/capabilities, and (4) effective governance. We examine each of these potential sources of rent in detail, identifying key subprocesses, and also discuss the isolating mechanisms that serve to preserve relational rents. Finally, we discuss how the relational view may offer normative prescriptions for firm-level strategies that contradict the prescriptions offered by those with a resource-based view or industry structure view.

https://www.jstor.org/stable/pdfplus/259056.pdf

The Relational View: Cooperative Strategy and Sources of Interorganizational Competitive Advantage

This paper elucidates the underlying economics of the resource-based view of competitive advantage and integrates existing perspectives into a parsimonious model of resources and firm performance. The essence of this model is that four conditions underlie sustained competitive advantage, all of which must be met. These include superior resources (heterogeneity within an industry), ex post limits to competition, imperfect resource mobility, and ex ante limits to competition. In the concluding section, applications of the model for both single business strategy and corporate strategy are discussed.

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The cornerstones of competitive advantage: A resource‐based view

Our theory of costly contracts emphasizes the contractual rights can by of two types: specific rights and residual rights. When it is costly to list all specific rights over assets in the contract, it may be optimal to let one party purchase all residual rights. Ownership is the purchase of these residual rights. When residual rights are purchased by one party, they are lost by a second party, and this inevitably creates distortions. Firm 1 purchases firm 2 when firm 1's control increases the productivity of its management more than the loss of control decreases the productivity of firm 2's management.

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The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration

The potential of post-contractural apportunistic behavior for improving market efficiency through intrafirm rather than interfirm transactions is examined under the assumption that vertical costs will increase less than contracting costs as specialized assets and appropriable quasi rents increase. Vertical integration protects against the risk of contract cancellation and can create market power which is not generally referred to as monopoly. Contracts used as a alternative provide economically enforceable protection against opportunistic behavior. Solutions to opportunistic behavior problems can include joint ownership of common assets and condominium ownership of services. Economies of scale are major factors in some businesses, such as insurance. The complexities of ownership relations makes it difficult to assign higher costs to either the contract or vertical-integration approach. This suggests that economic analysis should be used to identify which is most advantageous for specific kinds of activities.

https://idv.sinica.edu.tw/kongpin/teaching/contract/Klein(slide).pdf

Vertical Integration, Appropriable Rents, and the Competitive Contracting Process

THIS paper addresses the relationship between litigated disputes and disputes settled before or during litigation. The specification of this relationship is important for the analysis both of the legal system and of the influence of the legal system on society. Virtually all systematic knowledge of the legal system derives from studies of appellate cases. Appellate cases, of course, provide the most direct view of doctrinal developments in the law. Few scholars today, however, are content to study doctrinal developments alone without regard to the broader influence of legal rules on social affairs. Appellate cases may tell us which disputes courts find troublesome and which they find easy to decide. But this doctrinal information discloses very little about how legal rules affect the behavior of those subject to them or affect the generation of legal disputes themselves. If all legal disputes, or even a random sample of these disputes, were tried to judgment and then appealed, the inference from legal rules to social behavior would be straightforward. The facts of appellate cases

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The Selection of Disputes for Litigation

Court enforcement and private enforcement are not alternative contract enforcement mechanisms, but are used jointly by transactors to define the self-enforcing range of a contractual relationship. Within this framework contract terms economize on the limited amounts of private enforcement capital possessed by transactors, either by directly controlling transactor behavior or by shifting private enforcement capital between transactors to coincide with likely future market conditions. Hold-ups occur when market conditions change sufficiently to place the relationship outside the self-enforcing range. This probabilistic view of hold-ups is contrasted with opportunism more generally and with moral hazard behavior.

Why 'Hold-Ups' Occur: The Self-Enforcing Range of Contractual Relationships

Transaction Cost Determination of “Unfair” Contractual Arrangements

One of my most enjoyable intellectual experiences was working with Armen Alchian on the Klein, Crawford and Alchian [1978] hold-up paper. In this paper I extend the basic framework presented in that paper, pointing out what I now consider to be its shortcomings and providing insights into the nature of hold-ups and the form of contracts chosen by transactors to avoid hold-ups. The major analytical extension entails combining hold-up analysis with my work on private enforcement. Because private enforcement capital is limited and written contract terms are necessarily imperfect, transactors must optimally combine court-enforced written terms together with privately enforced unwritten terms to define what I call the self-enforcing range of their contractual relationship. Hold-ups occur when unanticipated events place the contractual relationship outside the self-enforcing range. This probabilistic framework, where transactors enter contractual relationships knowing that a hold-up may take place (but believing that the expected gains from trade outweigh the expected rent-dissipating costs associated with the hold-up risk), is shown to have important implications for understanding the structure of contracts adopted by transactors in the marketplace. I. WHY DO HOLD-UPS OCCUR? I begin with a simple example that illustrates the basic economic forces involved in a hold-up. Assume that a builder constructs a house on a piece of land the builder does not own but, rather, only leases short-term. After the initial land lease expires, the landowner could hold up the builder by raising the land rent to reflect the costs of moving the house to another lot. This example illustrates all the hold-up factors emphasized in Klein, Crawford and Alchian - (a) the builder has made an investment that is highly specific to a particular piece of land and (b) the landowner has taken advantage of the incompleteness of the contract that governs the relationship (in particular, the fact that the lease does not cover future years) to (c) expropriate the quasi-rents on the builder's specific investment. The obvious question is why anything like this would ever occur; that is, why would someone be so naive as to build a house on land for which they had only a short-term lease? Our primary goal in Klein, Crawford and Alchian was not to explain the existence of hold-ups, but rather the institutions adopted by transactors to avoid hold-ups. For example, we would expect that builders, anticipating a potential hold-up problem, would decide to purchase the land or at least to sign a long-term ground lease before starting construction. However, we do present some examples in the paper of hold-ups that actually occurred. The implicit reason we give for the occurrence of these hold-ups is transactor ignorance. Apparently, transactors are not always smart enough to choose the contractual arrangement that would eliminate the hold-up problem. Oliver Williamson provides a similar, but much more explicit answer to the question of why hold-ups occur. When defining "opportunism" he states: By opportunism I mean self-interest seeking with guile. This includes but is scarcely limited to more blatant forms, such as lying, stealing and cheating. Opportunism more often involves subtle forms of deceit. ...More generally, opportunism refers to the incomplete or distorted disclosure of information, especially to calculated efforts to mislead, distort, obfuscate, or otherwise confuse.(1) For example, the hold-up may have occurred in our illustrative house construction example because the landowner deceived the builder with a low up-front land rental price and vague promises about the future. Relying on the ability of one transactor to take advantage of the naivete or ignorance of another transactor is a highly unsatisfactory way to explain the incidence of hold-ups. Simple examples of deception, such as a builder constructing a house on land that is only rented short-term, rarely, if ever, occur. …

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Benjamin Klein

Papers

Vertical Integration, Appropriable Rents, and the Competitive Contracting Process

The Selection of Disputes for Litigation

Why 'Hold-Ups' Occur: The Self-Enforcing Range of Contractual Relationships

Transaction Cost Determination of “Unfair” Contractual Arrangements

Why hold‐ups occur: the self‐enforcing range of contractual relationships