Wonjoon Chung School of Labor and Employment Relations (LER) September 4 th , 2012

1. Comparative Economic Organization: The Analysis of Discrete Structural AlternativesOliver E. Williamson, 1991Published in Administrative Science Quarterly Wonjoon Chung School of Labor and Employment Relations (LER) September 4th, 2012

2. About Oliver E. Williamson… • American economist • Professor at University of California, Berkeley • Nobel Memorial Prize in Economic Science (2009) • Transaction cost economics theory • http://groups.haas.berkeley.edu/bpp/oew/

3. Research Purpose • To identify and explicate the key differences that distinguish three generic forms of economic organization: market, hybrid, and hierarchy • To unify two disjunctive areas of institutional economics: the institutional environment and the institutions of governance

4. Discrete Structural Analysis • Factors that support discrete structural analysis in the paper • Firms are not extension of markets but employ different means • Discrete contract law differences support and define each form • Marginal analysis is concerned with second order effects – economizing (via discrete structural governance) is first order • Contract Law • Classic contract law (Williamson, 1979, 1985) • Neoclassical contract law Neoclassical contract law is characterized by the excuse doctrine and forbearance (hierarchy)

5. Discrete Structural Analysis • The underlying rationale for forbearance law • parties have deep knowledge of dispute and efficient solutions (it would be costly to communicate them, and they may not be verifiable outside the organization) • Permitting internal disputes in courts would undermine the nature of the firm. • First-Order Economizing Effective adaptation and elimination of waste Allocative efficiency → Neglect of organizational efficiency

6. Dimensionalizing Governance • The discriminating alignment hypothesis • Transactions (which differ in their content) are aligned with governance structures (which differ in their costs and competencies). • Adaptability and incentive/control instruments are key.

7. Discriminating Alignment • Asset specificity • the degree to which an asset can [not] be redeployed to alternative uses and by alternative users without sacrifice of productive value • Alignment • Plot the governance costs as a function of the asset specificity (Ignoring the revenue and production-cost consequences of specificity)

8. Comparative Statistics • To consider how equilibrium distributions of transactions will change in response to disturbances in the institutional environment • Choices are discrete [Comparative statistics] • Property rights • Governmental expropriation • Leakage • Contract law • Uncertainty (Figure 3)

9. Conclusion • The economic problem of society is described: adaption, autonomous and coordinated kinds • Each generic form of governance is shown to rest on a distinctive form of contract law • Hybrid form of organization has own disciplined rationale • The logic of each generic form of governance: dimensionalization and explication of governance • The institutional environment and the institutions of governance: Parameter shifts