Showing papers by "Oliver E. Williamson published in 2009"

Pragmatic methodology: a sketch, with applications to transaction cost economics

Abstract: I address the topic of pragmatic methodology as a practitioner in applied microeconomics who has been working in the still nascent field of the ‘economics of organization’ My purpose is both to make explicit the methodology out of which transaction cost economics works and to suggest that other theories of economic organization do the same Conceivably convergence will develop in the process, maybe even a consensus At a minimum, it will be useful to have each implicit methodology made explicit I begin with some contrasting views on methodology Section 2 sets out the rudiments of pragmatic methodology Section 3 examines how transaction cost economics responds to the four precepts of pragmatic methodology Additional methodological considerations that are posed by transaction cost economics are discussed in section 4 Concluding remarks follow

Transaction Cost Economics: The Natural Progression

Abstract: Oliver E. Williamson delivered his Prize Lecture on 8 December 2009 at Aula Magna, Stockholm University. He was introduced by Professor Bertil Holmlund, Chairman of the Economic Sciences Prize Committee.

Transaction Cost Economics: The Precursors

Abstract: Building on Oliver Williamson’s original analysis, the contributors introduce new ideas, different perspectives and provide tools for better understanding changes in the approach to regulation, the reform of public utilities, and the complex problems of governance. They draw largely upon a transaction cost approach, highlighting the challenges faced by major economic sectors and identifying critical flaws in prevailing views on regulation. Deeply rooted in sector analysis, the book conveys a central message of new institutional economics: that theory should be continuously confronted by facts, and reformed or revolutionized accordingly.

Towards a Formal Model of the Transaction Cost Theory of the Firm

Abstract: This paper attempts to formalize the transaction cost theory of the firm. Building on the formal approach of Grossman and Hart (1986), a model is developed to capture the essential elements of the transaction cost theory, particularly those that are distinct from the formal property rights theory (PRT). In contrast to the PRT model, ours focuses on specific investments in alienable assets and ex post transactional inefficiencies. We define integration of two firms to imply common ownership of alienable assets from both firms, which entails control rights over the use of the assets as well as claims on their residual value. One important advantage of the model is its ability to deal with integration between non-owner-managed firms.

Friedman (1953) and the theory of the firm

Abstract: Inasmuch as “all theories, not just the neoclassical, start with the existence of firms” (Arrow 1999, vi), since the theory of the firm figures prominently in both Milton Friedman's essay on “The methodology of positive economics” (F53) and my own research agenda, and since we are all closet methodologists, I responded with alacrity to the invitation to prepare a paper on F53 as it relates to the theory of the firm. My remarks are organized in four parts. I begin with what I take to be the main message of the essay: most economists are and should be engaged in the study of positive economics. What I regard as overreaching parts of the essay are discussed in section 2. Post-1953 developments in the theory of the firm are sketched in section 3. Concluding remarks follow. The main message The first ten pages of the F53 contain the main message. Specifically, the task of positive economics “is to provide a system of generalizations that can be used to make correct predictions about the consequences of any change in circumstances. Its performance is to be judged by the precision, scope, and conformity with experience of the predictions it yields” (F53, 4). Additionally, simplicity and fruitfulness are important criteria in evaluating alternative theories (F53, 10). As Friedman subsequently remarks, “Most phenomena are driven by a very few central forces. What a good theory does is to simplify, it pulls out the central forces and gets rid of the rest” (Snowdon and Vane 1997, 196).

Opening the Black Box of Firm and Market Organization: Antitrust

Abstract: This book explores the revolutionary development of the theory of the firm over the past 35 years. Despite rapid progress in the field, new developments in the microeconomic and industrial organization literature have been relatively scant. This book attempts to redress the balance by providing a comprehensive overview of the theory of the firm before moving on to examine firms and the organization of their economic activities. The contributors also investigate the impact of ownership structure and board composition on firm performance and study how the institutional framework of an economy affects investment decisions.

Alfred D. Chandler Jr

Abstract: 15 SEPTEMBER 1918 * 9 MAY 2007 TO A STUDENT of the modern corporation with an interest in "managerial discretion" (which includes but goes beyond the corporate governance concerns posed by the separation of ownership and control), Alfred D. Chandler's book Strategy and Structure (1966) came as a bombshell. My dissertation, "The Economics of Discretionary Behavior: Managerial Objectives in a Theory of the Firm" (1963; published in 1964 with the same title), which had been inspired in part by William Baumol 's famous sales maximization hypothesis (1959), summarizes the literature on the modern corporation and sketches the research agenda that I then had in mind. That agenda underwent a major change after I read Chandler. Prior to my reading of Chandler, the need for the firm to observe a minimum profit constraint, together with competition in the product and capital markets, was the main control over managerial discretion that I had taken into account. Since many of the large firms that were of interest to Chandler (and to me) were operating in oligopolistic industries that afforded the firms with an appreciable degree of relief from product market competition, and since competition in the capital market (mainly proxy contests, since takeover by tender offer had yet to be perfected) was weak, it was my judgment (and that of many others) that large U.S. corporations typically enjoyed considerable latitude (sometimes referred to as "slack"). Strategy and Structure introduced a new control instrument: managerial discretion also varied with the organizational structure of the firm. This was a revolutionary concept, and I was reluctant to embrace it. Could it be that management was both the problem and the solution? This possibility certainly had to be entertained if, contrary to received microtheory, organization form mattered. The first step, which I had already taken, was to recognize that managerial discretion was problematic. The second step was to confront the latent lesson of Strategy and Structure: If organization form was a decision variable, then provision for that should thereafter be made in the theory of the modern corporation.1 As described and explained by Chandler, the multidivisional form was an "organizational innovation" (as devised by Alfred P. Sloan Jr., Donaldson Brown, Pierre du Pont, and others) that often served as a more effective check on managerial discretion than the earlier unitary (U-form) form of organization. Compared with the (U-form), in which strategic and operating decisions were joined, the multidivisional (M-form) structure worked out of a logic of organization in which operating and strategic decisions were separated (the logic being akin to that set out by W Ross Ashby in his 1960 book, Design for a Brain). The resulting decentralized structure was one in which the top management (the general office, as Chandler described it) had been removed from operating involvements and had been made responsible for strategic decision making and resource allocation within the firm, and the operating parts were organized as a series of quasi-autonomous divisions, each of which could be held accountable for its own net receipts. …