Markets make or buy transacon cost economics tce

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Unformatted text preview: illiamson (1979). Transac<on ­ Cost Economics: The Governance of Contractual Rela<ons. Journal of Law and Economics, 22(2): 233 ­261. •  Coase’s student (Nobel 2009) •  TCE  ­ explains and predicts the scope of the firm – helps understand firm’s boundaries •  Different from Resource Based View of the Firms in that it delineates boundaries of an organiza<on by the decision to make or buy (RBV by its knowledge, resources and competencies) 1 Firms vs. Markets: Make or Buy? Transac<on Cost Economics (TCE) •  Disadvantage of “make” in ­house Williamson (1985, 1991): –  Administra<ve costs –  Principal – agent problem •  owner = principal, manager = agent •  Decision entails choosing between: •  Agent pursues his/her own interests •  Disadvantage of “buy” from markets –  A market (“buy”) –  A hybrid arrangement (alliances, franchises, JVs) –  A hierarchy (“make” / firm) –  –  –  –  Search cost Opportunism – seeking self ­interest Incomplete contrac<ng – not all con<ngenices can be an<cipated Enforce legal contracts •  Informa?on asymmetries •  Three transac<on akributes influence this decision: –  One party is more informed than others mostly due to the possession of private informa<on –  Asset specificity –  Uncertainty (Volume, technology, etc.) –  Frequency of transac<ons •  Akerlof – “Lemons problem” for used cars $8K – goodcar, $4k – a lemon, 50/50 chance of knowing customers split the difference and pay $6K for either as they don’t know (“Crowding out” good cars) •  Collabora<ve R&D projects – biotech start ­ups will offer “lemons” technologies to big pharma through strategic alliances while keeping...
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