9-28-09 - Economics 448 Class Notes 9/28/09 WHEN YOU QUOTE...

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Economics 448 – Class Notes – 9/28/09 WHEN YOU QUOTE OR PARAPHRASE FOR ARTICLE, PLEASE USE CITATIONS! Good things about the market: Specialty Economies of scale Bad things about market: Transaction costs 1. Search 2. Bargaining 3. Enforcement Example: Marriage Between Bargaining and Enforcement costs Fundamental Transformation When you stop negotiating with other potential trading partners and focus on just one trading partner Enforcement costs: Marriage Threats and promises Brinkmanship (“If you don’t do this, I am leaving you…”) Counselor (THIRD PARTY ARBITRATOR) o Or priest, religious figure Williamson – FOCUSES MOSTLY ON ENFORCEMENT COSTS When is it hardest to write a contract and get a person to comply? o When someone can act opportunistically Highest enforcement costs when we have asset specificity (which allows for opportunistic behavior) The asset is specific to that transaction (and is difficult to move to some other use) When there are high appropriable quasi-rents, then those enforcement costs will be the highest also Enforcement costs – highest when: 1. Asset specificity 2. Appropriable quasi-rents
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Williamson - When there is no asset specificity or appropriable quasi-rents, JUST USE THE MARKETPLACE Take advantage of specialization and economies of scale Idiosyncratic investments – unified contracting integration (2 firms buy one another) or transaction takes place within a single firm) Incentives: High powered incentive – o Tied somehow to a signal of performance Example: If I sell 100 shoes, I get $1 per pair of shoes. If I don’t meet this goal, I do not get the $1. Example: Waitress and tips good service = good tips Example: Stock options Tying your pay to a signal SIGNAL – I am getting information from something o I can think of signals as: Noisy signal – Not a clear signal Example: More Shoe sales
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9-28-09 - Economics 448 Class Notes 9/28/09 WHEN YOU QUOTE...

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