Showing papers on "Opportunism published in 2005"

The Strategic Use of Decentralized Institutions: Exploring Certification with the Iso 14001 Management Standard

Abstract: In this article, we respond to calls by previous researchers to clarify the function of decentralized institutions by analyzing the strategic motives of individual actors. We investigated an important type of decentralized institution, certified management standards, and theorized that firms use these institutions to reduce problems that might arise with exchange partners that lack information or fear opportunism. We tested this theory using the pattern of certification with the ISO 14001 management standard.

The Formation of Buyer—Supplier Relationships: Detailed Contract Drafting and Close Partner Selection

Abstract: Firms face two strategic decisions when engaging in a new purchase transaction: the decision whether to draft a detailed contract and the decision whether to select a partner with which they share a close tie. The authors study how organizational culture affects these decisions and the effectiveness of these decisions in curtailing the partner's opportunistic behavior. The results suggest that organizational culture exerts an important but different influence on both decisions. Selecting a close partner shows a marked ability to hedge against partner opportunism, but beyond a certain point, it encourages the opportunism it is designed to discourage. Contracting becomes effective only when a nonclose partner is selected and when the focal relationship is embedded in a network of close mutual contacts.

Trust, commitment and relationships in supply chain management: a path analysis

Abstract: Purpose – The primary purpose of this study is to examine the relationships between the level of trust and several relevant constructs drawn from transaction cost analysis (such as asset specificity, behavioral uncertainty, and partner's opportunism) and social exchange theory (informational sharing).Design/methodology/approach – A comprehensive questionnaire based on various theories on trust and commitment was mailed in 2001 to supply chain practitioners in the Midwest region. A total of 171 valid returns were received out of 1,800 mailings (9.5 percent). A path analysis was used to estimate parameters or relationship between relevant constructs and trust, and trust with the level of commitment.Findings – A firm's trust in their supply chain partner is highly associated with both parties’ specific asset investments and social exchange theory. Information sharing has a primary impact on reducing (improving a partner's uncertainty behavior which, in turn, would improve the level of trust. Finally, the lev...

Small Firms and Offshore Software Outsourcing: High Transaction Costs and Their Mitigation

Abstract: It seems surprising that small firms engage in offshore outsourcing given that they lack the resources that large firms possess to overcome the difficulties involved. We examine these factors using transaction cost theory’s three stages: contact costs, contract costs, and control costs. Then, using our field data from small client firms (in the United States and the United Kingdom), intermediaries, and offshore vendors, we analyze the mitigation approaches that reduce transaction costs for small firms. We identify nine such approaches: three for client firms and six for suppliers. For the small client firm, they are liaisons of knowledge flows, gaining experience, and overcoming opportunism; and, for the service providers, they are onshore presence, reducing contact costs, simplifying contracting, providing control channels, expert intermediaries, and standardization of services.

Political selection and the quality of government: evidence from South India

Abstract: This paper uses household data from India to examine the economic and social status of village politicians, and how individual and village characteristics a®ect politician behavior while in o±ce. Education increases the chances of selection to public o±ce and reduces the odds that a politician uses political power opportunistically. In contrast, land ownership and political connections enable selection but do not a®ect politician opportunism. At the village level, changes in the identity of the politically dominant group alters the group allocation of resources but not politician opportunism. Improved information °ows in the village, however, reduce opportunism and improve resource allocation.

Organizational partnerships in China : Self-interest, goal interdependence, and opportunism

Abstract: Opportunism in organizational partnerships may be understood in terms of how partners conclude that their self-interests are related to each other. When partners believe that their goals are competitively but not cooperatively related, they are tempted to pursue their self-interests opportunistically. Cognitive understandings and values of a shared vision may help partners believe their goals are cooperatively related. Results from 103 pairs of customer and supplier organizations support the argument that partnerships are not inevitably threatened by opportunism. Using structural equation analysis, the authors suggested that shared vision can help partners develop cooperative goals that lead to low levels of opportunism. These results suggest that a shared vision and cooperative goals are important foundations for effective organizational partnerships.

Agency Problems in Diverse Contexts: A Global Perspective

Abstract: Bruce, Buck and Main (2005) offer two criticisms of agency theory as a valid model of executive behaviour. First, they suggest that because researchers have failed to find a strong empirical link between executive pay and firm performance, and since this research generally rests on models derived from agency theory, then we must question the theory. Second, they suggest that agency theory is under-socialized and therefore lacks generalizability to settings where social solutions would seem to eliminate the agency problem. In our response we make three points. First, agency theory rests on an assumption of self-interest that does not necessarily reflect opportunism. Second, agency theory does not make any reference to pay-performance sensitivity, and the failure of this research can be attributable to a variety of problems with the research. Third, we agree that agency theory does not explicitly recognize contextual factors, but suggest that this abstraction from context, gives agency theory greater generalizability. Finally, we review the UK and German contexts discussed by Bruce, Buck and Main to show that socialized solutions do not prevent the occurrence of agency problems.

Homeowners Associations, Collective Action and the Costs of Private Governance

Abstract: This paper examines collective action problems in privately managed neighbourhoods and considers government and market reponses to these. Taiwan's experience of Home Owners Associations (HOAs) is used to show that entrepreneurs have a strong incentive to deliver private governance capacity and are apparently more effective in doing so than either government (by coercion) or residents (by voluntary association). However, government needs to reduce certain collective action costs by providing appropriate enabling legislation. While the market can deliver private democratic government, it cannot do so in a way that avoids many of the costly features of public government. Within HOAs, problems of information asymmetry and opportunism, collective action and rent-seeking all persist. The paper concludes that much of the efficiency of contractual democratic neighbourhoods comes through the privatisation of bureaucracy—handing over civic goods and services supply and management to highly competitive and innovativ...

From Shareholder Value to CEO Power: The Paradox of the 1990s:

Abstract: Why did CEO remuneration explode during the 1990s and persist at high levels, even after the Internet bubble burst? This article surveys the alternative explanations that have been given of this paradox, mainly by various economic theories with some extension to political science, business administration, social psychology, moral philosophy and network analysis. It is argued that the diffusion of stock options and financial market-related incentives, supposed to discipline managers, have entitled them to convert their intrinsic power into remuneration and wealth, both at micro and macro level. This is the outcome of a de facto alliance of executives with financiers, who have exploited the long-run erosion of wage earners’ bargaining power. The article also discusses the possible reforms that could reduce the probability and the adverse consequences of CEO and top-manager opportunism: reputation, business ethic, legal sanctions, public auditing of companies, or a shift from a shareholder to a stakeholder conception.

Public–private partnerships in the US and Canada: “There are no free lunches”1

Abstract: Governments in many industrialized nations have made concerted efforts to reduce their immediate expenditures and to reduce the cost of major infrastructure projects. Public–private partnerships (P3s) are one emerging method that might do so. Despite the increased use of P3s, there is little independent research on the effectiveness of P3s as a public policy instrument. This article considers the major rationales for P3s, including cost savings and keeping project financing off government budgets. It then presents a transaction cost model that suggests that P3s can often be prone to conflict, high contracting costs, opportunism and failure. Evidence from six major infrastructure projects and a summary analysis of US prisons is then presented. These cases confirm that contracting costs have been high, as predicted by the model. Specifically, high contracting costs reflect the presence of complexity/uncertainty, asset specificity, the potential for ex post bilateral opportunism and a lack of contra...

Structural determinants of joint venture performance

Abstract: In this paper we sketch a theory of the motives of alliances and joint ventures, deduce the reasons for their instability, and discuss the structural factors that affect their performance. We argue that the alliance literature, by focusing on knowledge internalization, has given short shrift to the empirically more important motive of knowledge access, a strategy we call ‘cooperative specialization’. Cooperative specialization allows firms to pool their competencies with those of their partner and to specialize in what they do best, but it also exposes them to opportunism. We discuss how such opportunism can be checked by proper structural design. The main issue is how to reward partners for their contribution to the alliance, and two main contractual forms are possible, ex ante and residual-sharing contracts, a category which includes equity joint ventures. Focusing on the latter, we investigate how various structural solutions can be used to align the interests of the joint venture partners.

Regulatory Opportunism and Investment Behavior: Evidence from the U.S. Electric Utility Industry

Abstract: Large sunk costs and incomplete regulatory contracts in public utilities create the possibility of opportunistic behavior by either regulators or regulated firms. We present an empirical methodology for identifying opportunism within a regulated setting, and apply it to the large-scale cost disallowances levied by state regulators on electric utilities during the 1980s. Examining the investment propensity of all firms---both those that faced cost disallowances and those that did not---within particular regulatory jurisdictions, we find little evidence that cost disallowances were opportunistic. Instead, regulators appear to have been largely driven by the desire to punish specific poorly managed utilities.

Alliance Institutionalization and Alliance Performance

Abstract: Military alliances are formed with varying degrees of institutionalization. While some alliances involve little initial investment or joint planning, others involve significant peacetime costs in establishing formal structures and engaging in military coordination. Several scholars have addressed the reasons states are willing to pay these governance costs in establishing cooperation—through controlling the risks of opportunism and coordinating policy more extensively, state leaders may be able to achieve higher benefits from cooperation. What has received less systematic empirical attention, however, is the comparative performance of highly institutionalized alliances. Are alliances that represent “deeper” cooperation more reliable than their less institutionalized counterparts? The newly expanded Alliance Treaty Obligations and Provisions (ATOP) dataset includes detailed information about the institutionalization of alliances formed between 1815 and 1989. Using these data, we evaluate the effects of ins...

One-Sided Contracts in Competitive Consumer Markets

Abstract: This paper shows that "one-sided" terms in standard contracts, which deny consumers a contractual benefit that seems efficient on average, may arise in competitive markets without informational problems (other than those of courts). A one-sided term might be an efficient response to situations in which courts cannot perfectly observe all the contingencies needed for an accurate implementation of a "balanced" contractual term when firms are more concerned about their reputation, and thus less inclined to behave opportunistically, than consumers are. We develop this explanation, discuss its positive and normative implications, and compare them to those of information-based explanations for one-sided terms.

The Strategic Use of Decentralized Institutions: Exploring Certification with ISO 14001 Management Standard

Abstract: In this article, we respond to calls by previous researchers to clarify the function of decentralized institutions by analyzing the strategic motives of individual actors. We investigated an important type of decentralized institution, certified management standards, and theorized that firms use these institutions to reduce problems that might arise with exchange partners that lack information or fear opportunism. We tested this theory using the pattern of certification with the ISO 14001 management standard.

Taiwan's State and Social Movements Under the DPP Government, 2000–2004

Abstract: This article explores the evolution of social movement politics under the Democratic Progressive Party (DPP) government (2000–2004) by using the perspective of political opportunity structure. Recent “contentious politics” in Taiwan is analyzed in terms of four changing dimensions of the opportunity structure. First, the DPP government opens some policy channels, and social movement activists are given chances to work within the institution. Yet other features of the political landscape are less favorable to movement activists. Incumbent elites' political orientation shifts. As the economic recession sets in, there is a conservative policy turn. Political instability incurs widespread countermoblization to limit reform. Last, the Pan-Blue camp, now in opposition, devises its own social movement strategy. Some social movement issues gain political salience as a consequence of the intervention of the opposition parties, but its excessive opportunism also encourages the revolt of antireform forces. As a result of these countervailing factors, social movements have made only limited gains from the recent turnover of power.

Signaling in Political Budget Cycles: How Far Are You Willing to Go?

Abstract: A key assumption in the literature on political cycles with rational voters and opportunistic politicians is that opportunism is common knowledge. In this framework, political cycles have been interpreted as a signal of competency. However, if opportunism is not common knowledge, cycles may no longer indicate competency, but rather opportunism. This is because highly opportunistic incumbents are willing to go farther to be reelected. Since political cycles require discretionality to reallocate budget items, a decrease of discretionality curbs cycles. It may also make elections more effective at selecting competent incumbents.

Governance Mechanisms of Opportunism: Integrating from Transaction Cost Analysis and Relational Exchange Theory

Abstract: This study explores, from the perspectives of transaction cost analysis and relational exchange theory, the governance mechanisms that a manufacturer uses to manage a supplier's opportunism. Through this study, how the manufacturer can employ the mechanisms of selection, asset specificity, and relational norms respectively and simultaneously to mitigate the supplier's opportunism is understood. The results indicate that the manufacturer can employ the aforementioned mechanisms respectively to reduce the supplier's opportunism. When high relational norms exist between exchange partners, from the perspective of relational exchange theory, the moderate selection and asset specificity the manufacturer implements are best to restrain the supplier's opportunism.

Employment as a Relational Contract

Abstract: Employment scholarship focuses too much on laws and not enough on norms. Yet norms capture the complete terms of employment more accurately than most legal contracts. Virtually every aspect of the employment relation that falls outside the realm of contract lawyers - corporate culture, office politics, trust, future planning, and the complex social matrix of organizational life - are the exclusive domain of norms. Bundled together, work norms form a contract, a relational contract, which is more important to the parties in most situations than any formal written agreement. Whereas scholars have frequently examined legal aspects of employment contracts, employment at will, and wrongful discharge, little attention has been paid to systematically developing an enforceable theory of employment norms. This article fills this scholarly gap by defining employment as a relational contract forged by the behavior of the parties. Part I of this article defines employment as a relational contract. Part II establishes the sources of relational contract at work. Part III presents two case studies that show maintenance of relational contract is critical for the successful organization. Part IV devises an opportunism-based enforceable theory of relational contract in the employment context.

Efficiecy of agrarian organisations

Abstract: The goal of this paper is to incorporate achievements of the New Institutional and Transaction Costs Economics to analysis of efficiency of agrarian organizations in transitional economies. That modern framework for analysis of agrarian organizations is based on their role to govern transactions between individual agents. Since governing (coordination, organization) of transactions is associated with significant costs (for finding best prices and partners, for negotiation and contracting, for monitoring and enforcement of contract terms, for adjustment and re-negotiation according to changed conditions of exchange, for dispute resolutions etc.), the economic efficiency of agrarian organizations has to assess not only their capacity to minimize the production costs, but their potential to economize transacting costs as well. Initially, main kinds of transactions of the managers of agrarian transactions (farms entrepreneurs) are clarified as land, labor, service, inputs, and finance supply; marketing; and collective actions. After that, the alternative market, non-market, and mixed modes for organization of different types of agrarian transitions are identified. Next, various types of costs associated with each form of transacting are determined. And then, the comparative efficiency of different governance structures is estimated according to (minimum) transacting costs criteria. One direction for evaluation of comparative efficiency of governing structures is based on direct assessment of items of costs for transaction in different organizations. However, that manner is often restricted since: difficulties (or impossibility) to measure absolute level of transaction costs; opposite dynamics of different items of costs in various organizations; great use of complex (and interlinked) rather than pure modes in transitional agriculture; and not existence (missing) of alternative form for organization (the base for comparison). Another direction is through comparative structural (qualitative) analysis of alternative governing forms. Firstly, critical factors of transactions in particular institutional environment are identified. These factors affect transaction costs variation, and they are associated: with behavioral characteristic of agrarian agents (bounded rationality, tendency for opportunism, building of reputation, risk aversion, level of trusts); and with economic dimensions of individual transactions (frequency, uncertainty, assets specificity and appropriability). Secondly, assessment is made on effective potential of alternative organizational modes to: minimize bounded rationality of agrarian agents and uncertainty associated with transacting; to appropriate and protect private investments from possible opportunism; to recover long-term investments for organizational development through high recurrence of transactions between same agents; to exploit economy of size and scale on specific for relationship with a particular partner capital etc. Third, principal matrix of generic organizational modes is build for effective governance of transactions with different combination of critical dimensions: free market mode if effective to carry out transactions with high appropriability and low assets specificity; the special contract form is appropriate for transactions with high frequency, and increased uncertainty and assets specificity; the internal integration can manage effectively repeated transactions with high capital dependency and big uncertainty; the hybrid and public modes are the most effective forms for occasional transactions with low appropriability and high assets specificity. Finally, effective horizontal and vertical boundaries of every specific form within each generic modes could be determined through comparison of their potential to explore economy of size (scale) on specific or (and) specialized assets, and their comparative efficiency to minimize bounded rationality and to control opportunism of counterparts.

Quality Shipping and Incentive Schemes: From the Perspective of the Institutional Economics

Abstract: With serious maritime accidents not showing signs of decrease, concern over the quality of shipping is growing more than ever. Many maritime rules and regulations are implemented to regulate shipping. However, they are only to set out the minimum standard. More proactive measures using incentives have recently been introduced to promote a higher level of governance in ship management and operation. The original and the new institutional economics give interesting perspectives on the governance structure and the institutional environment surrounding these phenomena of shipping transactions. The concepts of bounded rationality and opportunism in institutional economics are applicable to shipping. Incentive schemes can be seen as the agents of change. This paper intends to explain how incentives are being incorporated in the governance structure of shipping and influence the evolution of institutions functioning under the shipping culture, which is embedded in the minds of people.

On the opportunism-independent theory of the firm

Abstract: Previous developments in the opportunism-independent theory of the firm are either restricted to special cases or are derived from the capabilities or resource-based perspective. However, a more general opportunism-independent approach can be developed, based on the work of Demsetz and Coase, which is nevertheless contractual in nature. This depends on 'direction', that is, deriving economic value by permitting one set of actors to direct the activities of another, and of non-human factors of production. Direction helps to explain not only firm boundaries and organisation, but also the existence of firms, without appealing to opportunism or moral hazard. The paper also considers the extent to which it is meaningful to speak of 'contractual' theories in the absence of opportunism, and whether this analysis can be extended beyond the employment contract to encompass ownership of assets by the firm. © The Author 2005. Published by Oxford University Press on behalf of the Cambridge Political Economy Society. All rights reserved.

Political selection and the quality of government: evidence from south India

Abstract: This paper uses household data from India to examine the economic and social status of village politicians, and how individual and village characteristics a®ect politician behavior while in o±ce. Education increases the chances of selection to public o±ce and reduces the odds that a politician uses political power opportunistically. In contrast, land ownership and political connections enable selection but do not a®ect politician opportunism. At the village level, changes in the identity of the politically dominant group alters the group allocation of resources but not politician opportunism. Improved information °ows in the village, however, reduce opportunism and improve resource allocation.

Regulation and Opportunism: How Much Activism Do We Need?

Abstract: This paper analyzes the current trend towards firms' self-regulation as opposed to the formal regulation of a negative externality. Firms respond to increasing activism in the market(conscious consumers that take into account the external effects of their purchase) by providing more socially responsible goods. However, because regulation is the outcome of a political process, an increase in activism might imply an inefficiently higher externality level. This may happen when a majority of non-activist consumers collectively free-ride on conscious consumers. By determining a softer than optimal regulation, they benefit from the behavior of firms, yet they have access to cheaper (although less efficient) goods.

The Impact of Directors' Option Compensation on Their Independence

Abstract: This study examines how the use of option-based compensation for directors affects their independence in their decisions on CEOs' option-grant dates. Firms typically grant CEOs at-the-money options, i.e., with the strike price set equal to the grant-day stock price. This practice creates a unique opportunity for CEOs to benefit from Timing Opportunism, whereby CEOs lower the grant-day stock price in order to increase the value of their option grants. Prior evidence indicates the existence of timing opportunism, because CEOs tend to receive options before (after) good news (bad news). Since directors frequently receive options at the same time as CEOs, directors also benefit from timing opportunism, so they may not have an incentive to constrain CEOs' timing opportunism. We hypothesize that, ceteris paribus, directors are more likely to constrain CEOs' timing opportunism when these directors receive a lower proportion of their compensation from stock options. We find evidence consistent with our hypothesis in a large sample from 1992 to 2002. Our results indicate that, when used as a common component of CEOs' and directors' compensation, stock options can compromise director independence in this particular setting.

Regulatory opportunism and investment behavior: evidence from the U.S. electric utility industry

Abstract: Large sunk costs and incomplete regulatory contracts in public utilities create the possibility of opportunistic behavior by either regulators or regulated firms. We present an empirical methodology for identifying opportunism within a regulated setting, and apply it to the large-scale cost disallowances levied by state regulators on electric utilities during the 1980s. Examining the investment propensity of all firms – both those that faced cost disallowances and those that did not – within particular regulatory jurisdictions, we find little evidence that cost disallowances were opportunistic. Instead, regulators appear to have been largely driven by the desire to punish specific poorly managed utilities.