“Disturbances” in Transaction Cost Economics

4 February 2007 at 12:17 pm 1 comment

| Nicolai Foss |

One of Oliver Williamson’s key and most cited contributions is his 1991 paper in the Administrative Science Quarterly, “Comparative Economic Organization: The Analysis of Discrete Structural Alternatives.” The paper introduces a number of themes that had until then only been present in a rather embryonic form in Williamson’s work (e.g., the 1985 locus classicus, The Economic Institutions of Capitalism: 1) Governance structures are fully characterized as discrete structural alternatives, 2) full(er) account is taken of “hybrids,” and 3) economic organization is cast in a dynamic setting, the discussion of which seems heavily inspired by Hayek’s work on economic change and the use of knowledge in society.

With respect to 3), Williamson’s here introduces the notion of disturbances and argues that the “frequency” of disturbances is a determinant of economic organizations; specifically, hybrids are abandoned as this frequency increases in favor of markets and hierarchies. The underlying argument is that, in an incomplete contracting setting, more disturbances mean more levers for opportunistic recontracting. However, Williamson’s discussion is sketchy and rather puzzling. For example, why exactly is “frequency” important? If disturbances can be anticipated, frequency shouldn’t matter. Rather, the extent to which disturbances can be anticipated would seem to be decisive. Such conceptual difficulties may be a reason why virtually no empirical work exists on hybrid stability as a function of disturbances. (My 2003 Organization Science paper touches on this in the context of internal hybrids).

However, the most recent issue of the Strategic Management Journal features a nice empirical study by Yadong Luo, “Are Joint Venture Partners More Opportunistic in a More Volatile Environment” that goes a significant way towards dealing with the hybrid-disturbance issue. Several measures for volatility/”disturbances” are put forward, such as industry structural instability, information unverifiability, and “perceived law unenforcability” (the latter are, however, not clearly theoretically linked to disturbances). Here is the abstract:

This study examines how joint venture partners’ opportunism is influenced by environmental volatility in a drastically changing emerging economy. Building on transaction cost and information-processing theories, we develop the hypothesis that opportunism increases to cope with industry structural instability, information unverifiability, and law unenforceability, the three interrelated yet distinct characteristics that jointly describe environmental volatility in an emerging economy. Our analysis of 188 foreign joint ventures in an emerging market suggests that opportunism increases with information unverifiability and law unenforceability. These relationships are even stronger when joint ventures depend more on the host country environment, but weaker when joint ventures operate in faster-growing industries. Finally, opportunism is found to play a mediating role in the relationship between environmental volatility and joint venture performance.

Related: The Treatment of Frequency in Transaction Cost Economics

Entry filed under: - Foss -, Theory of the Firm.

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1 Comment Add your own

  • 1. Paolo MARITI  |  5 February 2007 at 5:53 am

    Industry structural instability, information unverifiability and perceived law unenforceability are all factors leading to greater difficulties as to protecting and securing property rights.
    Arrangemens among parties face greater transaction costs and the choice of modes of governance changes as well.
    In a world with positive and increasing TC, legal regimes (as well as many other institutions) do matter. A question then becomes most challenging: the status and role of legal regimes in fast development and change

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Nicolai J. Foss and Peter G. Klein, Organizing Entrepreneurial Judgment: A New Approach to the Firm (Cambridge University Press, 2012).
Peter G. Klein and Micheal E. Sykuta, eds., The Elgar Companion to Transaction Cost Economics (Edward Elgar, 2010).
Peter G. Klein, The Capitalist and the Entrepreneur: Essays on Organizations and Markets (Mises Institute, 2010).
Richard N. Langlois, The Dynamics of Industrial Capitalism: Schumpeter, Chandler, and the New Economy (Routledge, 2007).
Nicolai J. Foss, Strategy, Economic Organization, and the Knowledge Economy: The Coordination of Firms and Resources (Oxford University Press, 2005).
Raghu Garud, Arun Kumaraswamy, and Richard N. Langlois, eds., Managing in the Modular Age: Architectures, Networks and Organizations (Blackwell, 2003).
Nicolai J. Foss and Peter G. Klein, eds., Entrepreneurship and the Firm: Austrian Perspectives on Economic Organization (Elgar, 2002).
Nicolai J. Foss and Volker Mahnke, eds., Competence, Governance, and Entrepreneurship: Advances in Economic Strategy Research (Oxford, 2000).
Nicolai J. Foss and Paul L. Robertson, eds., Resources, Technology, and Strategy: Explorations in the Resource-based Perspective (Routledge, 2000).