What Are Hybrid Forms and How Can They Be Modeled?
| Nicolai Foss |
Many scholars have argued that hierarchies are increasingly infused by market mechanisms (e.g., here and here), and that elements of authority can increasingly be witnessed in market transactions. This has been referred to as the “swollen middle hypothesis.” A major step forward in the understanding of such hybrid governance is Williamson’s seminal 1991 paper in the ASQ, “Comparative Economic Organization: The Analysis of Discrete Structural Alternatives,” and Holmström and Milgrom’s equally important 1994 paper in the AER, “The Firm as an Incentive System.”
However, it is quite arguable that the theoretical understanding of hybrid governance is still deficient. For a long time, Anna Grandori has argued that the literature over-emphasizes the “discreteness” of hybrids; the space of possible combinations of governance mechanisms is much larger than Williamson (or Holmström and Milgrom) portrays it (e.g., here and here). There are neither strong theoretical, nor empirical reasons for ascribing the strong complementarities to governance mechanisms that Williamson does.
In a recent paper (that won the Glueck Best Paper Award for the BPS Division at this year’s Academy of Management meeting), “Both Market and Hierarchy: An Incentive-Systems Theory of Hybrid Governance Forms,” two O&M favorites, Rick Makadok and Russ Coff, develop a similar point. They point out that in extant thinking on hybrid forms, the dimensions or attributes of governance structures (in Holmstrom and Milgrom: authority, ownership, and incentives) move together simultaneously. Forms that are intermediate in this sense do exist — as witness joint ventures –, but most hybrid forms do not fall neatly in the middle in terms of the relevant dimensions. They are market-like on some dimensions and hierarchy-like on other dimensions. The problem is how to model this more complex picture of hybrids.
Russ and Rich begin from the Holmström and Milgrom (1994) model which they modify in one small, but crucially important way: They assume that there may be positive externalities between costly-to-measure tasks and less-costly-to measure tasks. For example, if an employee becomes more productive (which may not be costly to measure) by cooperating with others (which may be costly to measure), providing high powered rewards for the task that is not costly to measure may spur costly-to-measure cooperation. This possibility is ruled out by Holmström and Milgrom and it is this feature that makes them conclude that the firm must be characterized by authority, ownership on the part of the principal, and low-powered performance rewards.
Intuitively, the Makadok and Coff modification allows for the possibility of high-powered rewards in hierarchies, that is, a true hybrid form. This is generalized, so that their model can explain the combinations of authority (strong-weak), ownership (principal owns asset – agent owns asset), and rewards (weak-strong) that are ruled out by the Holmström and Milgrom model (and Williamson’s approach as well).