Organizational Economics: Notes on the Use of Transaction-Cost Theory in the Study of Organizations Author(s): James A.

Robins Source: Administrative Science Quarterly, Vol. 32, No. 1 (Mar., 1987), pp. 68-86 Published by: Johnson Graduate School of Management, Cornell University Stable URL: http://www.jstor.org/stable/2392743 . Accessed: 25/10/2011 04:58
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Organizational Economics: Notes on the Use of TransactionCost Theory in the Study of Organizations James A. Robins
University of California, Los Angeles

Transaction-cost theory has helped to give new life to some of the classic issues of organization studies through the use of microeconomic models. However, the assumptions underlying these models have not been examined carefully, and this has produced serious logical and empirical weaknesses in recent works. This paper reviews transaction-cost approaches to organizational analysis, examines their use of microeconomic theory, and identifies some important flaws in the work. It concludes by arguing that transactioncost theory can be a powerful tool for organizational and strategic analysis but that it must be set within the framework of more general organization theory. The last decade has witnessed rapidgrowth of interest in economics among students of organizations. The development of what has been called the new institutional economics (Williamson, 1979) has helped to renew concern for some of the central questions of organization theory. Issues such as the analysis of vertical integration have turned the attention of economists to traditionalproblems of the definition of organizational boundaries, and their work has begun to have an important impact on the field of organization studies. Recent research in the field has recast the organization as a "stable pattern of transactions" (Ouchi, 1980: 140) and employed concepts from economics to analyze internal exchange. The influence of economics on organization studies has been a mixed blessing. It has had the positive effect of pushing the field in the direction of greater rigorby encouraging theorists to use more precise definitions and to build systematic theory from general axioms about social behavior. But it also has carried with it the liabilities of any effort to step outside the field in search of new concepts or metaphors. It has been conducive to the sort of incautious borrowing of ideas that Pinder and Bourgeois (1982) identified as an endemic weakness of organizational research. Some of the recent work in organization studies reflects this weakness. A growing body of research has attempted to apply concepts borrowed from areas such as the economics of law or economics of industrialorganization to analysis of the origins and structure of complex organizations (Williamson, 1975; Ouchi, 1980; Jones, 1983). The uncritical use of market models has led to serious logical and empirical flaws in much of this work.

(? 1987 by Cornell University. 0001 -8392/87/3201-0068/$1 .00.

Iwould like to thank Richard Daft, Scott Edmundson, Gareth Jones, Michael Masuch, and the anonymous ASQ reviewers for insightful comments on earlier drafts of this paper. The ideas presented in it also owe a great deal to discussion and debate among members of the Organization and Strategic Studies group of the UCLAGraduate School of Management, including (among others) Jay Barney, William Ouchi, and Richard Rumelt. None of these individuals bears any responsibility for errors or idiosyncratic opinions that remain in the paper. An earlier version was presented at the Academy of Management Annual Meeting in 1985.

The principalpurpose of this paper is to review these flaws and look at their implications for the development of organization studies. This entails discussion of three general issues. First, the paper will examine how recent work on transaction costs is shaped by concepts borrowed from economics. Second, it will identify assumptions that are criticalto the use of these concepts in neoclassical economics. And third, the paper will indicate ways in which transaction-cost analysis of organizations fails to meet some of the fundamental assumptions of the microeconomic logic. Iwill argue that the weaknesses of the work on transaction costs are not due to inherent flaws in the approach but stem from an excessively ambitious objective: the attempt to explain the causes or origins of organization structure. There are press68/AdministrativeScience Quarterly,32 (1987): 68-86

Organizational Economics

ing reasons for this attempt, but the attempt proves to be the Achilles heel of the current literature. As the conclusion of the paper will suggest, the fact that transaction-cost analysis has been yoked to causal explanation has resulted not merely in flaws in the current work, but in the loss of important opportunities for the development of research on strategic organization. Iftransaction-cost analysis is relieved of the burden of causal explanation, it may provide valuable tools for organizational and strategic analysis. THE TRANSACTION-COST LOGICIN ORGANIZATION STUDIES Although transaction-cost theory has been used to analyze a wide variety of organizational activity, including bureaucracy (Williamson, 1979), vertical integration of production (Williamson, 1971; Klein,Crawford, and Alchian 1978), clan-like relations within firms (Ouchi, 1980), and organizational culture (Jones, 1983), its underlying concepts are not complex. In basic terms, transaction costs are those costs associated with an economic exchange that vary independent of the competitive market price of the goods or services exchanged.1 They include all search and information costs, as well as the costs of monitoring and enforcing contractual performance. Although these costs are independent of the competitive market price of the goods or services, they are determined by the nature of the exchange. Issues such as the difficulty of setting prices or measuring the performance of services are instrumental in determining transaction costs. The determination of transaction costs and their effect on exchange have been explored at some length by Williamson (1975, 1979) building on the earlier work of Coase (1937). Williamson (1979) cited factors such as uncertainty in determining appropriate (competitive) prices, difficulty in monitoring and enforcing postcontractual performance, and the necessity of specialized (transaction-specific) investments as major sources of transaction costs. He argued that these costs may be reduced by the organization of exchange through a variety of nonmarket mechanisms, including bureaucratic administration. While administered transactions may involve higher costs than market organization in a purely theoretical world with frictionless exchange, costs of administration in the real world often are outweighed by reductions that administered exchange achieves in transaction costs. Bureaucratic organization, for example, involves both the cost of maintaining an administrative apparatus and a potential loss due to the (theoretically) greater efficiency of the market in transmitting information. However, these costs may be smaller than the alternative costs that would be associated with contracting for complex labor skills on a task-by-task basis. Reduced to essentials, the argument is a simple one; where market organization of economic exchange is cumbersome and costly, other forms of transaction governance (such as contingent contracting, third-partyarbitration,or bureaucratic organization) may prove efficient. Nonmarket forms of exchange will arise in situations in which markets "fail," that is, when alternative forms possess greater efficiency.

Formal definitions of transaction costs are remarkably rare in the literature. The definition suggested here has the virtue of highlighting the relationship between transaction costs and market imperfection. Transaction cost is a residual category essentially composed of the factors that produce idiosyncratic prices, i.e., prices that vary across purchasers of a good (see Dahlman, 1979, for a discussion of alternative definitions of transaction costs).

Ouchi(1980) carriedthis lineof reasoningone step furtherand adarguedthat there also are situationsinwhich bureaucratic
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ministration of exchange is extremely costly. Inthose situations, clan-like forms of organization may be efficient. Complex forms of work, for example, may require a degree of flexibility and innovation that precludes standardized monitoring and merit-reward systems. Under those circumstances, compensation must be based on other criteria, such as tenure in the organization or group performance. Strong norms of organizational solidarity are required for these incentives to be effective in securing individualperformance. This perspective is amplified by Wilkins and Ouchi's (1983) examination of organizational culture. Intheir analysis, organizational culture is treated as the set of solidarity norms referred to above. Due to the nature of exchange processes, some organizational settings make more severe demands on these norms than others and thus require stronger forms of organizational culture. Jones (1983) took this line of reasoning to one of its logical conclusions by equating the structure of property rights in an organization to its culture. In his view, a variety of technical factors mandates the forms of exchange that must be carried out within an organization, and the allocation of property rights directly affects the level of cost associated with those exchanges. Jones argued that transaction-cost minimization determines the efficient property rights system and thus defines the organizational culture. These works, and others that use transaction-cost economizing to analyze organization structure, share an underlying model of social causation that is borrowed from neoclassical economics. They employ what might be termed a doctrine of economic efficiency to explain social organization. In simple terms, this is the idea that forms of organization that are more efficient for economic exchange will supplant less efficient ones, with the result that observed organization structure comes to represent an efficient solution to problems of exchange. Although the concept of efficiency is criticalto the transactioncost model, it is not elaborated in the transaction-cost literature. Transaction-cost analysis relies on an implicit analogy to neoclassical economics, and the analogy is flawed. The concept of efficiency that is employed in economics has only limited relevance to organization studies. THE USES OF EFFICIENCY A BASIS FOR CAUSALITY AS The Concept of Efficiency in Economics Efficiency has a very specific connotation in economics: it is the matching of supply to demand that produces the greatest consumer surplus. This idea is not necessarily related to efficiency as measured by an engineering relationship between the physical inputs and outputs of a production process. It is the provision of a socially desirable mix of goods and services, as determined by demand revealed through the price system. This notion of efficiency stems from some of the root concepts of microeconomic theory. Each individualin society is assumed to have a set of preferences for goods and services and a set of trade-offs he or she is willing to make among those goods and services. Collectively, these individualutilityfunctions determine the aggregate demand for each good and the elasticities
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EconomicE

of substitution among goods. Under given resource constraints, the production of some specific mix of goods and services will come as close as is possible to satisfying the preferences of the population. Any mix of goods and services that is less effective in satisfying demand is less efficient (from the standpoint of social welfare). Since the goods and services produced are a consequence of social organization, it is possible to speak of one set of social arrangements as more economically efficient (producing a higher level of social welfare under given resource constraints) than another. The claim laid by capitalism to theoretical superiority as an economic system is based on the idea that more efficient social arrangements will displace less efficient ones in a market economy. The price system moves society toward efficiency by directing production to revealed demand. The power of the price system to move society toward efficient economic arrangements relies on competition within industries. In microeconomic theory, an industry consists of a group of firms that employ a common set of resources to produce goods that are perfect substitutes. Competition among these firms will force them to adopt an identical price for those goods. Inthe absence of collusion among the members of an industry, this price will be equal to the minimum average cost of production. A firm that adopts a higher price will be unable to sell its output, and any firm unable to produce at the minimum average cost of competitors will take losses that will drive it out of business. In perfectly competitive markets for products and factors of production, the firms of an industry are nothing more than identical combinations of resources that serve the function of paying factors of production the value of their marginal products. Pure competition is the force that drives this process. Costefficient organization structure and efficiency in the provision of social welfare are not independent of each other. The operation of the price system produces both results under conditions of competitive equilibrium. Inthe absence of equilibrium, the economic logic supports no causal inferences about the role of efficiency in determining social or organizational structure.2
2 This is not intended to imply that a single utility-maximizing solution exists. The assertion made here is far less strong; it is that no alternative solution exists that offers a greater level of social welfare (i.e., at least equal utility to all individuals and greater utility to some). 3 The idea of causality or causal explanation has a long and difficult history in the sciences (Brown, 1977), and it would be impossible to do justice to it in this paper. The here, following idea is used conservatively a concept commonly attributed to David Hume (1969). Causality involves an-empirical regularity in which two events are obthe antecedent served only in sequence; event is treated as the cause of the subsequent event. The theoretical construct that links these phenomena is a causal law, and it may designate only a probable relationship between events - although the probability should be, as Russell (1948: 308) argued, "considerably more than half."

The Uses of Economic Efficiency in Transaction Cost Analysis The transaction-cost analysis of organizations gives a causal role to efficiency that is similar to the role it takes in economics. Transaction-cost minimization becomes a primarydeterminant of organizational form under the assumption that the most efficient internal structure will displace all others. This is an economic model ratherthan an engineering or input-output concept of efficiency; it involves maximization of the value of the output of the firm relative to production cost. The underlying argument is analogous to the microeconomic analysis of industry structure. Just as the microeconomic model of an industry involves a set of firms that are constrained to common prices and common levels of productive efficiency, the transaction-cost model of the firm assumes a common, costminimizing organization structure. This assumption is the cornerstone of the efforts made by Ouchi (1980), Williamson (1975), and others to identify the origins of organization struc-

ture and the underlying rationale formalorganization.3 for

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Causal explanation of this sort is vital to transaction-cost analysis; it helps to rescue the approach from a deeply damaging tautology. As Williamson (1979) has noted, the bate noire of transaction-cost theory is the complaint that it can be used to rationalize virtuallyany economic phenomenon. Ifthe perspective is employed for purely static analysis, the charge is well founded. It reduces too readily to the circularityof inferring transaction costs from the existence of formal organization and explaining organization on the basis of inferred transaction costs. This type of reconstructed logic (Kaplan,1964) makes the transaction-cost approach vulnerable to the sort of criticisms that have been leveled at it by Perrow (1979, 1981) and others. It suggests a conception of social order not unlike the notion of progress associated with Leibniz (Nisbet, 1980) and parodied by Voltaire (1966: 1-2) in Candide, when Pangloss teaches that "there cannot be an effect without a cause . . . in this best of all possible worlds." Ouchi (1980), Williamson (1975), and some of the other recent proponents of transaction-cost analysis escape this sort of tautology by making the leap to causal explanation. Transactioncost theory then provides a basis for identifying the forces that shape organization structure in response to changing economic conditions. Inthe strong causal form of this explanation, economic efficiency takes on an evolutionary significance as the motive force of social change, and transaction-cost minimization emerges as the mechanism by which it is realized in organizations. But this use of the doctrine of efficiency also imposes new demands on transaction-cost analysis. While it elevates the transaction-cost approach from tautology to causal analysis, it exacts a price in the form of stringent logical and empirical requirements. The economic model involves important assumptions that also must be met by transaction-cost theory if the analogy between the two is to be useful. The Importance of Competition for Economic Efficiency The idea of competitive equilibrium is criticalto microeconomic concepts of efficiency. As pointed out above, efficiency is defined in economics in terms of the operations of a society composed of competitive industries. The individualorganization is a virtual nonentity in that model. Only under conditions of competitive equilibrium is it possible to say anything about the form of the firm and, in that case, the firm becomes a bundle of resources combined in the proportions necessary to ensure that each factor of production will be paid exactly the value of its marginal product. The achievement of this sort of equilibrium relies on the existence of perfectly competitive markets, and the requirements of a perfectly competitive market are very stringent. Ferguson (1972) suggested four conditions for a perfect market: small actors in large numbers (no individualcapable of affecting price), homogeneous products, free mobility of resources, and perfect knowledge. Although the first of these requirements has become the object of some debate (Baumol, Panzar, and Willig, 1982), there is substantial consensus on the others, and few economists would argue that the world abounds in perfect markets.
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Equilibriummodels can play an important part in the analysis of economic activity at the level of industry and society without offering any definite inferences about individualfirms. They serve to identify forces that move the economy in the direction of efficiency, even if efficient solutions stay permanently beyond reach. Ekelund and Tollison (1981: 18) have provided a concise characterization of the way these forces work in a competitive economy with imperfect markets: Inthis process, the presence of rents providesthe incentivefor re(andtherebymore source owners to seek out more profitable economicallyefficient)allocationsof theirresources. When competievolutionary process, the tion is viewed as a dynamic.value-creating, decisions and in entrepreneurial roleof economic rents in stimulating of an prompting efficientallocation resources is crucial.Rentseeking or profitseeking ina competitivemarketorderis thereforea normal, healthyfeatureof economic life. Overtime the returnsof resource owners will be dissipatedordrivento normallevels by competitive profitseeking, as some resourceowners earnpositiverents,which promoteentryby competitorsintotheiractivities,and others earn negative rents,which cause them to exit fromtheirpresent undertakreings. Profitseeking and normaleconomic rents are thus inherently latedto the efficiencyof the competitivemarketprocess. It is important to note that the economy described by Ekelund and Tollison is not populated by perfectly competitive firms that are operating at minimum average cost and earning no profits. It is replete with producers who are either earning economic profits or suffering negative rents. Inthe long run, positive rents enjoyed by producers who are skilled or lucky may be competed away, and the losses suffered by others may drive their investors away, but firms of any level of profitabilitymay be found at a given point in time. Although competition in imperfect markets may push the economy in the direction of an efficient set of organizational arrangements, there is no reason to expect the economy to arrive at one. As long as social conditions change (including those changed by the rent-seeking behavior of firms), opportunities will be created for some firms to earn rents while other firms suffer losses, and the organization of the firms in an industry may remain in flux. One of the fundamental strengths of neoclassical economics is precisely this abilityto reconcile imperfect markets with postulates of rationalbehavior by economic actors. Firm-level decision making may be rationalat the margin in a social setting that is far from economic rationality. Iffirms produce at the level of output that equates marginal revenue and marginal cost, the requirements of rationalbehavior are satisfied, regardless of the state of the economy or industry and regardless of the outcome of that activity for the firm. Once again, this reflects the distinction between short-term reality and a hypothetical long-term equilibrium. Only under conditions of competitive equilibriumwill the level of output that maximizes profits necessarily result in firms producing at equal (minimum average) cost. The economic process described by Ekelund and Tollison also tells nothing about the ability of individualfirms to respond to competitive pressures. Firms that are earning subnormal returns at a given point in time may eventually adapt and become more competitive, or they may perish as their capital assets are
redeployed in more profitable uses. Either process can be seen

as a movement of the economy inthe directionof efficiency,

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and either one can be reconciled with firm-level rationality. Because movement of the economy toward efficiency can be based on adaptation or attrition, it tells us nothing about the efficiency of existing organizations. Once again, it is possible to draw definite inferences about the nature of individualorganizations from processes that take place at the level of the larger economy only under equilibrium conditions. In reality, the degree to which any individualorganization will be pushed to find and adopt internal cost economies will reflect both the level of competitive pressure to which it is subjected and the available strategic alternatives. Inanything less than perfect markets, neither factor is certain, and both may vary substantially across organizations. Under nonequilibrium conditions, the competitive pressures on any individualfirm are uncertain, and the organization structure that will minimize transaction costs is indeterminate. This suggests some important flaws in the work on transaction costs. Transaction-cost analysis adopts a model that has clear meaning for organizations only in perfect markets and applies it to highly imperfect situations. The role played by efficiency is especially problematic in light of how little the neoclassical concept says about the behavior of individualorganizations.4 SHORTCOMINGS OF CURRENT USES OF TRANSACTIONCOST THEORY These problems become particularlyevident if we separate two levels of analysis that tend to be intertwined in the transaction-cost literature. On one level, transaction-cost analysis is applied to the tasks of institutional economic history, i.e., explanation of the prevailing institutional structure of a society or group of societies at some point in history. On another level, it is used to explain the adoption of a specific organizational form in response to conditions faced by the individualfirm. Although the issues are deeply interrelated, the underlying economic assumptions that shape these uses of transactioncost theory can be seen more clearly if they are examined independent of each other. Shortcomings of the Historical Analysis The work on institutional economic history is important both because it represents one of the principalempirical applications of transaction-cost theory to date and because it highlights certain questionable assumptions that play a significant part in transaction-cost approaches to organizational analysis. The use of transaction-cost theory to explore institutional history and its use in analysis of contemporary economic organization share an important underlying concept imported from microeconomics - the idea that a decentralized market structure represents the naturalorganization of exchange. This assumption serves a vital purpose in the purely theoretical context of neoclassical economics, but it can become deeply misleading when transferred to an empirically oriented discipline such as organization studies. Some of the recent uses of transaction-cost theory exhibit that problem; they have paid insufficient attention to the distinction between theory and its applications, with the result that they have failed to give reality the sort of priorityover theory that is required by an

4 The term organization, as it is used here, implicitly refers to price-taking private firms. This is the most generous assumplogic; tion in terms of the transaction-cost the private sector probably comes closer to competitive market behavior than any other part of the economy. Although all organizations compete for resources, the flaws of transaction-cost arguments appear more egregious when they are applied to the public sector.

empirically groundedfield.
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Williamson and Ouchi (1981: 365) provided an explicit statement of the transaction-cost approach to business and economic history. They argued that transaction-cost economics can be used to understand the motive forces behind organizational and institutional change in both preindustrialand industrialsocieties. The causal role ascribed to transaction-cost is stated unequivocally: Transactions cost economizingis, we submit,the driving force that is responsibleforthe maininstitutional [of changes.... Applications transactionscost economics] will includeproductmarketorganization andalso changinglaborandcapitalmarketforms of organization throughtime. Infocusing on the interplay between historical conditions and economic processes, Williamson and Ouchi (1981) were attempting to place organizational and business history within a rich tradition of institutional economic history. The institutional tradition makes a fundamental distinction between the social and political conditions that exist at a time and place and the economic processes that unfold within that social and political framework. Institutional economics directs attention to the ways in which historical conditions constrain the processes described by economic theory. Economists from Smith to Schumpeter have used the historical analysis of economic institutions as a means of bridging the gap between abstract models and the reality of economic life (North, 1978). North (1978: 963) described the institutional tradition in this way: These scholarsregardedeconomic historyas essential because it added a dimensionto economics. Its purposewas to analyzethe parametersheldconstant by the economist. Ifeconomics is a theory of choice subjectto specified constraints,a task of economic history was to theorizeaboutthose evolvingconstraints. Williamson's (1979) objective in the development of the new institutional economics evidently was to carrythis tradition forward, but the transaction-cost approach falls short of actually providing an institutional economic analysis. Although transaction-cost theory offers powerful tools for understanding the implications of specific social institutions for economic activity, it is incapable of explaining historical transformations in those social institutions. The transaction-cost approach ultimately is an extension and application of microeconomic theory, and its capacity to describe reality is bounded by the limits of the theory -that is, by the very institutional constraints that Williamson and Ouchi (1981) would attempt to explain. Williamson's (1980) interpretation of Chandler's (1977) work on the nineteenth-century economic development of the United States provides a good illustrationof the problem. Indiscussing the rise of the factory system, Williamson (1980) argued that factory production displaced less centralized forms of organization because substantial costs would have been associated with decentralized coordination of large-scale production processes. Williamson (1980) attributed the change in scale of production that made these processes economical to the appearance of infrastructure in the American west. However, the sources of infrastructure and the reasons for its
appearance in the nineteenth century remain largely

unexploredinWilliamson's(1980)work.
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Williamson's analysis stops just short of actually dealing with the problems of institutional economic history. It explores the implications of institutional constraints without confronting the issues involved in theorizing, in North's (1978: 963) words, "about those evolving constraints." In consequence, Williamson's (1980) attempt to forge a causal explanation does not go beyond a model shaped by "the parameters held constant by the economist" (North, 1978: 963). Williamson's vantage point is the interiorof the economic model, and his view of historical processes is distorted by the prism of macroeconomic theory. This inverted analytical approach leads to an inverted economic history. Williamson (1975) saw a process of economic evolution in which markets exist in the beginning. Growth in the complexity and scale of organization involves the substitution of hierarchy for market exchange. Inthe absence of certain conditions of market failure, formal organization can be expected to deteriorate under the omnipresent pressure toward decentralization that is exerted by market alternatives. Williamson may have been influenced in adopting this perspective by Alfred Chandler. Chandler (1977, 1980) presented an interpretation of the economic development of the United States as a process in which market coordination of the activities of small firms gave way to administered production and exchange organized within large hierarchies. Chandler (1980: 1-1)described the transformation in this way: The traditional was a single-unit firm or enterprise,with an individual a small numberof owners operatinga shop, store, factory,bankor line this transportation out of a single office. Normally, type of firmundertookto fulfill onlya single economic function,producedor sold a single lineof products,and operatedinone geographicarea. Before the rise of the modernfirm,the activitiesof these small,personally and owned and managedenterpriseswere coordinated monitoredprientermarily marketand pricemechanisms.The modernmultiunit by prise, in contrast,has come to operate in differentlocations,often out or carrying a numberof economic activitiesand producing selling several lines of goods andservices. The operationof its unitsandthe withinthe firm.The transactionsamong them have been internalized activitiesof these unitshave come to be monitoredand coordinated than by market by the decisions of salariedmanagersrather mechanisms. This description is misleading, primarilybecause it implicitly equates the economic activities characteristic of the earlier, small-enterprise period with those of the later, industrialera. The transformation discussed by Chandler involved more than just organizational change; it also involved fundamental change in the nature and level of economic activity in American society. The local communities of the early nineteenth century were not embedded in a dense web of national commerce and exchange. They existed in relative isolation, and a large portion of the production of that period took place within small communities and individualhouseholds for consumption in those communities and households. The rise of the large firm was associated with an increase in the level of commerce, i.e., with growth in the density and activity of the economy (Bruchey, 1975). The history of nineteenth-century economic development is less a story of hierarchy displacing markets than a tale of social and political centralization creating the conditions for
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large-scale commerce and large-scale production of goods (Knowles, 1967). The shortcomings of the market-centered approach employed by the transaction-cost theorists are even more apparent in the case of European economic history. The history of the industrializationof Western Europe provides strong testimony to the role of social and political development in setting the stage for economic growth. Perhaps the most telling example of this can be seen in one of the truly singular phenomena of European economic history: the early industrializationof England. In his monumental work, Mercantilism, Eli Hecksher (1935) detailed the role played by political development in paving the way for the consolidation of markets and the growth of industry in England. At a time when local autonomy in France had given rise to an arrayof tolls on the Rhone River so extensive that shipment of goods over unpaved roads was less costly than their transportation by water, English trade flourished under a centralized system of tariffs and a unified currency. The centralization of authority in England undoubtedly did reduce the cost of exchange dramatically, but national political development cannot be explained on the basis of its role in minimizing transaction costs without begging a variety of other important questions - such as why France took so long to arrive at a common system of tariffs or why the German states were slow to achieve unity. In France and Germany, economic unification might have produced benefits that dwarfed the advantages that it offered to England, yet local authorities successfully resisted the centralization of authority for centuries. These weaknesses in the transaction-cost approach to economic history spring from an underlying theoretical assumption: the idea that markets are the naturalform of economic exchange. From the standpoint of history, this idea is deeply flawed. Market organization was preceded by (among other things) feudalism, city-states, and cave-dwelling tribes. Large-scale market activity is relatively recent and remains relatively rare as a means of coordinating exchange. Although economic forces may push society in the direction of efficient forms of exchange, they act within the bounds of social and political systems. As Weber (1958) argued, the balance of historical evidence probably tips in the direction of seeing ideological, religious, and cultural change as occurring exogenous to and often priorto economic change. A fundamental distinction emphasized by North (1978) appears to have been lost in the transaction-cost approach. It is the distinction between the idiosyncrasies of real economic institutions and the abstractions of economic theory. Although transaction-cost theorists start with the type of objectives that Chandler (1971) defined for the analysis of business organization - a reintegration into the institutional economic tradition -they ultimately subordinate reality to theory. What is lost in the process is precisely the distinctive contribution of an empiricallygrounded discipline such as organization studies or economic history. Tawney's (1932: 102-103) eloquent description of the tasks faced by economic historians might be applied equally well to students of virtuallyany aspect of economic organization:

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Economic historians have sometimes made too much of the institutional side of their subject; but they cannot ignore the masonry which canalizes and deflects economic currents. They are concerned not merely with the market, but with the forces behind it. They cannot investigate the rise of new forms of economic enterprise without reference to the conditions which have given enterprise its opportunity, or understand historical changes in the distribution of wealth without a study of corresponding changes in the institution of property, the class-structure of society, and the policy of states. Shortcomings of the Organizational Analysis

The assumption that market organization is the natural form of economic exchange also accounts for many of the weaknesses of the transaction-cost approach to organizational analysis. As pointed out above, considerations of efficiency can be rigorously applied to organizations only under conditions of competitive equilibrium. Although some degree of technical or cost efficiency may be a prerequisite of organizational survival in nonequilibrium situations, it cannot be assumed to be an explanation of organization structure. On the contrary, any one of a large number of specific structural configurations might be adequate to carry out basic organizational functions of the sort that Simon (1957) identified: provision of incentives to individuals within the organization and acquisition of social and economic resources for the organization. There are a number of reasons why the fact that an organization can achieve what Simon (1957) characterized as a balance of "inducements" and "contributions" tells us little about the efficiency of its organizational structure. Simon (1957), Cyert and March (1963), and their colleagues discussed many of these issues more than twenty years ago in the early work on the behavioral theory of the firm. They argued that the behavior of individuals within firms cannot be assumed to be directed toward optimization of a common set of economic values. In the absence of that sort of optimizing behavior, the internal workings of an organization will not be accurately approximated by a market model in which competition among employees produces efficient operations. The types and amounts of specific inducements sought by individuals, and the quantities of those inducements offered for the performance of specified roles, may vary quite considerably among individuals and across organizations. Moreover, firms are not necessarily efficient in the satisfaction of those potentially idiosyncratic individual needs. On the contrary, the inefficiency of organizations in supplying the variegated needs of employees is one of the foundations on which the field of organizational development has been built, and it has been the focal point of major bodies of research such as the work of the human relations school (Vroom, 1964) or studies of sociotechnical systems (Davis and Cherns, 1975). Compelling arguments against the assumption of economic efficiency also have been mounted at the macro-organizational level. Meyer and Rowan (1977) have argued that legitimation and, consequently, the access of organizations to resources necessary to provide inducements, may rely on the performance of activities that contribute little to economic efficiency. They suggest that the functions performed by organizations (including private firms) reflect a variety of different social impera-

tives, including manythat have onlya tenuous relationship to

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Organizational Economics

economic ends. While an organization may be obliged to perform certain economic functions in order to subsist, those economic functions may represent only a small subset of the larger range of activities required for organizational survival, and many of the activities carried out by organizations may not be critical to survival (i.e., organizational slack may exist). The fact that an organization is successful in carrying out the activities that allow it to subsist does not necessarily imply that all of its operations are essential or that its observed structure is efficient. Finally,microeconomic theory offers powerful arguments against the idea that observed organization structure can be assumed to be efficient in the absence of competitive equilibrium. The costs of administration are only one component of the costs incurred by an organization in doing business. In the absence of perfect markets for all inputs to production, the assumption that firms will be pushed in the direction of a common, transaction-cost minimizing organizational form is unwarranted. Organization form may be heterogeneous even under conditions that come close to perfect competition in other regards. A group of firms might operate at common cost and produce products that are perfect substitutes, yet nonetheless employ different organizational forms with different levels of transaction costs if the firms are situated in imperfect factor markets. Each firm could arrive at the same average cost of supplying the product as the others by means of a unique combination of administrative cost and other production costs. Deprived of the assumption that perfect markets are either historically or logically the naturalstate of economic exchange, transaction-cost approaches to organizational analysis exhibit deep flaws. On one level, they promote a sort of historical inversion; markets are portrayed as an original state of social organization that gives way to bureaucracy and clan-like relations as economies become more complex, much as though economic history were being read backward from the present to the Middle Ages. At another level, they lead to a dubious model of causal processes within organizations - one in which formal organization owes its existence to a variety of obstacles that stand in the way of otherwise inescapable pressures toward decentralization. The weaknesses of the recent transaction-cost work are in large part a consequence of overambitious application of the theory to the problems of organization studies. The transactioncost perspective is not alone in its inabilityto provide causal models for organizational analysis. For more than a century, social scientists ranging from Max Weber to Herbert Simon have grappled with these problems, and their most cogent works generally have avoided strong causal explanations (Runciman, 1972). ALTERNATIVEUSES OF TRANSACTION-COST THEORY More modest applications of transaction-cost theory hold the promise of important insights into the activities of organizations. When set in a more general theoretical context, the transaction-cost perspective can be used for organizational analysis without reduction to tautology and without the abortive attempt to raise it o the status of a causal model. Although

transaction-cost theorycannot, in itself, providean accouint of

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the relationship between the individualand organization or the organization and society, it can help to explore those relationships once they are defined. Simon's (1957) classic treatment of the organization in society illustrates the sort of theory that can make transaction-cost analysis more useful in organization studies. Following Weber, Simon recognized the key role that formal organizations have come to play in dealing with the central problem of social organization: complex coordination of individualbehavior to achieve societal ends. In modern societies, organizations typically mediate relationships between individuals and the major institutions of the polity and economy. In order to play that part in society, organizations must be able to provide incentives that will secure individualperformance of organizational roles, and they must produce outputs that will allow them to claim the resources required to supply those individualincentives. As Ouchi (1980) has suggested, transaction-cost theory can offer some real insight into how organizations perform these functions. It gives a rigorous form to one of the critical issues of organization: internal governance. In providing incentives that are adequate to ensure individualperformance, organizations acquire a judicialcharacter; they must measure and reward performance according to legitimate standards. A substantial body of work (cf. Cyert and March, 1963; March and Olsen, 1976) has argued that this cannot be reduced to a simple rational calculus. It involves a variable combination of rationaland nonrational elements. Transaction-cost analysis provides a means of discussing the relative importance of those rationaland nonrational elements. Under specific social and technical conditions, certain forms of internal coordination may be less viable than others. A great deal of research has been done on the ways in which factors external to organizations can mandate the type of internal flexibilitythat renders formal systems of control costly (Burns and Stalker, 1961; Lawrence and Lorsch, 1967; Thompson, 1967). Transaction-cost theory provides a common framework for analysis of both the problems that environmental uncertainty may pose for internal coordination and the implications of different solutions to those problems for the competitive position of the organization. Applications of Transaction-Cost Theory to Strategic Analysis This approach to governance involves an explicitly strategic formulation of the organization-environment relationship.5 Although transaction-cost economizing alone is not sufficient to determine organization structure in the imperfect markets of the real world, organizational form does have an important role in strategic competition. The restructuring or redesign of organizations to suit changing environmental conditions is one of several areas in which competitive strategies can be formulated and implemented (Ansoff, 1968; Andrews, 1971). Transaction-cost theory can play an important part in strategy formulation by providing an analytical framework for discussion of the relative cost advantages offered by different forms of organization under specified environmental conditions. However, as argued above, organization structure cannot be assumed to be the sole source of interfirmdifferences in cost of production
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5 The concept of strategic analysis used here is very close to the idea of contingency as it is commonly employed in organization studies (Lawrence and Lorsch, 1967). The term strategic is chosen in preference to contingent because it highlights the uses theory in competitive of transaction-cost analysis.

Organizational Economics

or the price of goods.6 Organization is one competitive factor among many, and its relative importance in business strategy will be determined by the relationship between environmental conditions and the existing structure of the firm. Much of the power of transaction-cost analysis stems from the fact that it can help to clarifythe specific conditions that lend strategic importance to organizational design. Williamson's (1975) interpretation of Chandler's (1962) classic history of the Dupont Corporation offers a good example of this use of transaction-cost theory. In Strategy and Structure, Chandler (1962) detailed changes in the business and economic environment of the early twentieth century that led Dupont to diversify production and described ways in which the adoption of a multidivisional organizational form helped Dupont management deal with the problems of coordinating a largescale, diversified enterprise. Chandler argued that change in the organizational structure of Dupont (and several other firms) came in response to environmentally driven strategies. In Markets and Hierarchies, Williamson (1975) used transaction-cost theory to develop a more general interpretation of the strategy-structure relationship portrayed by Chandler. He argued that a multidivisional structure is more effective than either the traditionalfunctional organization or the holding company in minimizing costs of coordination associated with diversified enterprise. Williamson (1975) supplemented Chandler's (1962) observations about the liabilities of functional administration with economic arguments for the strategic weakness of pure holding companies. InWilliamson's analysis, the transaction-cost logic is particularlyuseful in drawing out the strategic implications of organizational issues by recasting them in terms of the relative cost advantages offered by different structural arrangements. When combined with Chandler's (1962) work on the ways in which diversification served as a response to changes in the social, economic, and political environment, it provides an effective means of exploring the strategic implications of organization-environment relations. It is important to recognize that this is not a causal explanation of organizational change. The potential advantages of the multidivisional structure ultimately rely on exogenous environmental conditions, and the impact of adoption of a multidivisional form of organization varies across firms and over time. This emerges particularlyclearly in studies that deal with the effect of the multidivisional form on firm performance, such as the work of Rumelt (1974) or Armour and Teece (1978). Both Rumelt (1974) and Armour and Teece (1978) found that adoption of a multidivisional organization structure appeared to improve performance under certain specific conditions, but they also found significant variation among firms in the adoption of structural changes. Both studies observed firms that managed to survive for years with operating structures that apparently were anomalous. These empirical studies help to illustrate the difference between the application of a transaction-cost logic to strategic analysis and its use in causal explanation. In strategic analysis,
transaction-cost theory provides a set of tools for examining

6 Organization structure would be the sole source of interfirm differences in production cost or price only under conditions of competitive equilibrium in factor and product markets. However, under equilibrium conditions, the concept of firm-level strategy becomes meaningless.

the the economic environmentand identifying potentialcom81/ASQ, March 1987

petitive advantages of specific organizational configurations. The use of transaction-cost theory in strategic analysis involves application of a general economic logic to specific organizations and the particularsettings in which they operate. Although the analytical logic is quite general, each application of it is potentially idiosyncratic. Causal explanation, in contrast, involves generalization across cases and the attempt to anticipate (or predict) common elements of organization structure from theoretical laws or principles. While transaction-cost analysis offers considerable potential as a prescriptive approach to the problems of business strategy, it has far less promise as a means of dealing with the larger issues associated with the evolution of organizational form. Applications of transaction-cost theory that do not attempt to make it the basis for causal explanation have the virtue of reintegrating broad social issues that have dropped out of some of the recent research. Social and cultural factors appear as analytical variables ratherthan unanalyzed "given conditions" in this type of work. When transaction costs are dislodged from their position as the motive force of organizational change, the conditions that mandate more or less costly forms of governance become an integral part of the analysis. For example, long-term employment and promotion based on seniority might offer a solution to the problem of providing incentives for ambiguous work roles in one social setting (Ouchi, 1980), while compensation systems built around those practices might be unacceptable or even illegal in a different milieu. Inthe latter case, economic activities that were costly to organize in any other fashion might not be sufficiently profitable to be undertaken.7

IMPLICATIONSFOR RESEARCH Despite the fact that transaction-cost economics has the potential to provide powerful tools for organizational analysis, it has spawned relatively little empirical research on organizations. With certain notable exceptions (cf. Teece, 1984; Walker and Weber, 1984), efforts to apply transaction-cost theory have focused on the broad questions of economic history discussed above. In contrast to a number of other approaches to organizational analysis - such as the work on environmental contingency (Pennings, 1975; Lawrence, 1981) organizational ecology (Hannan and Freeman, 1977; Carroll, 1984), or resource dependence (Pfeffer and Salancik, 1978)transaction-cost economics has remained primarilya theoretical perspective, with most research concentrated on conceptual development and refinement (cf. Leblebici, 1985). The difficulties faced by researchers in applying transactioncost theory originate, at least in part, in the logical problems examined above. The use of transaction-cost economics for causal analysis has deflected attention from some of the issues to which transaction-cost theory is most germane. Just as the use of transaction-cost theory for causal explanation has tended to divorce economic history from its social and political foundations, the attempt to move to a causal account of organizational change has systematically excluded critical environ82/ASQ, March 1987

7
Perhaps the most obvious example of this is in the unionized manufacturing industries where work rules and practices designed to protect job security have contributed to the inability of domestic firms to meet foreign competition. However, it merits comment that similar arguments also may be applied to many of the fundamental legal protections afforded to workers in the United States. The issues of social policy that come into play in this sort of situation are complex, and economic theory can serve to illuminate only a relatively narrow spectrum of those issues.

Organizational Economics

mental variables from t he transaction-cost analysis of organizations. In both cases, the effort to explain institutional change on the basis of microeconomic processes has obscured the role played by historical and social forces in defining the conditions under which competition takes place. A flawed economic historiography probably is not the most important consequence of the attempt to employ transaction-cost theory for causal analysis. The neglect of opportunities to gain new insight into organization-environment relations may be a more serious liabilityof the approach. Transaction-cost theory offers the unfulfilled promise of joining together important bodies of research in organization studies and industrialorganization economics to create a unified analysis of the ways in which organization structure is shaped by the exigencies of survival in competitive environments. Inthe field of organization studies, few issues have been examined in greater depth than the link between environmental uncertainty and the autonomy of subunits within firms (Burns and Stalker, 1961; Lawrence and Lorsch, 1967; Mintzberg, 1983). At the same time, an extensive body of economic research has detailed a similar relationship between market structure and the decentralization of industries (Kamien and Schwartz, 1982). Despite strong parallels in these findings, the connection between internal and interfirmeconomic organization has not received a great deal of attention in organization studies or industrial-organizationeconomics. Transaction-cost economics provides a basis for integrating the research of these two fields by eliminating the traditionaldichotomy between organizations and their environments. Transaction-cost theory treats the firm as a nexus of contracts for the purposes of analyzing the economic functions of organizations, and it reinterprets the varieties of internal and interfirmeconomic organization as points on a single, underlying spectrum of forms of exchange. In an analysis of that sort, differences among types of organization that range from traditionalbureaucracy to matrix structure or even disintegrated production would become matters of degree rather than distinctions in kind. Strategies that involve redefinition of the boundaries of organizations (such as merger or divestiture) would be treated as explicit alternatives to managerial strategies based on internal reorganization. These different types of economic organization could then be analyzed as sets of contractual relations among the individuals involved in economic activities (MacNeil, 1980; Leblebici, 1985). Transaction-cost theory bridges the gap between strategic analysis and the study of organizational behavior by providing a framework for understanding the economic implications of behavioral research. By reinterpreting problems of organizational behavior in terms of the governance of economic activity, transaction-cost economics provides tools for identifying the organization-environment linkages that lie at the root of the competitive advantages associated with different organizational strategies. In many ways, this type of transaction-cost analysis represents a return to the research agenda laid out by Barnard(1938) and

Simon (1957) beginningmore thanfortyyears ago. The attempt

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to understand the structures that govern economic activity involves analysis of the balance of "inducements" and "contributions" organized through administrative hierarchy. Ina transaction-cost approach, the study of inducements focuses on analysis of the ways in which specific types of contractual relations provide incentives and information to individuals engaged in economic activity (MacNeil, 1980; Arrow, 1985; White, 1985). To the degree that this economic activity takes place in the private firms of a capitalist economy, the study of contributions to organizational subsistence becomes research on competitive strategy. The analysis of organizational governance lies at the heart of these two areas of inquirybecause governance structures balance the two aspects of organization. Governance mechanisms serve to coordinate the economic activities of individuals in a manner that is compatible with the requirements of the competitive environment. It is important to recognize that the conditions under which competition takes place are likely to be idiosyncratic, and the insights provided by transaction-cost analysis may be specific to a firm or industry. This is one of the ways in which noncausal or strategic applications of transaction-cost theory depart from much of the organizational research that has been undertaken since Simon's (1957) early work. Transaction-cost economics is useful in organization studies not as a basis for general laws of organization, but as a means of integrating research on the behavioralaspects of organization into an economic and strategic analysis of the firm. This approach to transaction-cost economics suggests a program of empirical research focused on the ways in which firms reorganize in response to changes in the competitive conditions of industries over time. In research of this type, the different forms of organization employed by firms would be interpreted as sets of formal and informal contracts with specific incentive and information-bearing properties that could be analyzed using the techniques of behavioral research. Transaction-cost theory would provide a framework for understanding the economic or strategic implications of those behavioralobservations and linkingthem to the competitive conditions faced by the firm in its industry. Transaction-cost analysis can be a powerful technique when used in this way. The weaknesses of its current applications to organization studies indicate a misapprehension of the scope of the theory more than any intrinsic flaws in the theory. The analysis of transaction costs must be set within a broader theoretical context - it cannot serve as the basis for a more general historical or strategic analysis. If the scope of transaction-cost analysis is understood in this manner, the approach can be made to serve vital purposes in organization studies. As an adjunct to more general theory of the role of organizations in the economy and society - such as the work of Weber or Simon - it can help to provide a single framework for discussing processes of exchange within and among organizations. When used in that fashion, transactioncost theory can make a major contribution to the effort to bridge social and economic perspectives and create a unified analysis of organizations.
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Organizational Economics REFERENCES Andrews, K. R. 1971 The Concept of Corporate Strategy. New York: DowJones Irwin. Ansoff, H. Igor 1968 "Toward a strategic theory of the firm." In H. IgorAnsoff (ed.), Business Strategy: 1 140. Harmondsworth, England: Penguin Books. Armour, H. O., and David J. Teece 1978 "Organization structure and economic performance: A test of the multidivisional hypothesis." Bell Journal of Economics, 9: 106-122. Arrow, Kenneth 1985 "The economics of agency." In John W. Pratt and Richard Zeckhauser (eds.), Principals and Agents: The Structure of Business: 37-51. Boston: Harvard Business School. Barnard, Chester I. 1938 The Functions of the Executive. Cambridge, MA: HarvardUniversity Press. Baumol, William J., John C. Panzar, and Robert D. Willig 1982 Contestable Markets and the Theory of Industry Structure. New York: Harcourt Brace Jovanovich. Brown, Harold I. 1977 Perception, Theory and Commitment: The New Philosophy of Science. Chicago: Precedent Publications. Bruchey, Stuart 1975 The Growth of the American Economy. New York: Dodd, Mead. Burns, Tom, and G. M. Stalker 1961 The Management of Innovation. London: Tavistock. Carroll, Glenn R. 1984 "The dynamics of publisher succession in newspaper organizations." Administrative Science Quarterly, 29: 93-113. Chandler, Alfred D., Jr. 1962 Strategy and Structure. Cambridge, MA: MITPress. 1971 "Business history as institutional history." In George R. Taylor and Lucius F. Ellsworth (eds.), Approaches to American Economic History: 17-24. Charlottesville, VA: University of VirginiaPress. 1977 The Visible Hand: The Managerial Revolution in American Business. Cambridge, MA: HarvardUniversity Press. 1980 "The United States: Seedbed of managerial capitalism." In Alfred D. Chandler, Jr. and Herbert Daems (eds.), Managerial Hierarchies: 9-40. Cambridge, MA: HarvardUniversity Press. Coase, Ronald 1937 "The nature of the firm." Economica, 4: 386-405. Cyert, Richard M., and James G. March 1963 A Behavioral Theory of the Firm. Englewood Cliffs, NJ: Prentice-Hall. Dahlman, Carl J. 1979 "The problem of externality." Journal of Law and Economics, 22: 141-162. Davis, Louis, and Albert Cherns 1975 The Quality of Work Life. New York: Free Press. Ekelund, Robert, and Robert Tollison 1981 Mercantilism As a RentSeeking Society. College Station, TX: Texas A&M Press. Ferguson, C. E. 1972 Microeconomic Theory. Homewood, IL: Richard D. Irwin. Hannan, Michael T., and John Freeman 1977 "The population ecology of organizations." American Journal of Sociology, 82: 929-964. Hecksher, Eli 1935 Mercantilism. London: Allen & Unwin. Hume, David 1969 A Treatise of Human Nature. Harmondsworth, England: Penguin Books. Jones, Gareth 1983 "Transaction costs, property rights, and organizational culture: An exchange perspective." Administrative Science Quarterly, 28: 454-467. Kamian, Morton, and Nancy Schwartz 1982 Market Structure and Innovation. Cambridge: Cambridge University Press. Kaplan, Abraham 1964 The Conduct of Inquiry:Methodology for Behavioral Science. New York: Chandler. Klein, Benjamin, Robert Crawford, and Armen Alchian 1978 "Vertical integration, appropriable rents and the competitive contracting process." Journal of Law and Economics, 21: 297-326. Knowles, Lilian C. 1967 Economic Development in the Nineteenth Century: France, Germany, Russia, and the United States. New York:A. M. Kelley. Lawrence, Paul 1981 "The HarvardOrganization and Environment Research Program." InAndrew H. Van de Ven and William F. Joyce (eds.), Perspectives on Organization Design and Behavior: 31 1-337. New York: Wiley. Lawrence, Paul, and Jay Lorsch 1967 Organization and Environment. Cambridge, MA: HarvardBusiness School. Leblebici, Huseyin 1985 "Transactions and organizational form: A reanalysis." Organization Studies, 6: 97-115. MacNeil, Ian R. 1980 The New Social Contract. New Haven, CT: Yale University Press. March, James G., and Johan P. Olsen 1976 Ambiguity and Choice in Organizations. Oslo, Norway: Universitetsforlaget. Meyer, John W., and Brian Rowan 1977 "Institutionalized organizations: Formal structure as myth and ceremony." American Journal of Sociology, 83: 340360. Mintzberg, Henry 1983 Power in and around Organizations. Englewood Cliffs, NJ: Prentice-Hall. Nisbet, Robert 1980 The Idea of Progress. New York: Basic Books. North, Douglass 1978 "Structure and performance: The task of economic history." Journal of Economic Literature, 16: 963-978. Ouchi, William G. 1980 "Markets, bureaucracies, and clans." Administrative Science Quarterly, 25: 129-141. Pennings, Johannes M. 1975 "The relevance of the structural-contingency model for organizational effectiveness." Administrative Science Quarterly, 20: 393-41 0.

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Perrow, Charles 1979 Complex Organizations: A Critical Essay. Glenview, IL:Scott, Foresman. 1981 "Markets, hierarchies and hegemony." InAndrew H. Van de Ven and William F. Joyce (eds.), Perspectives on Organization Design and Behavior: 371-386. New York:Wiley. Pfeffer, Jeffrey, and Gerald R. Salancik 1978 The External Control of Organizations: A Resource Dependence Perspective. New York: Harper & Row. Pinder, Craig C., and V. Warren Bourgeois 1982 "Controllingtropes in administrative science." Administrative Science Quarterly, 25: 641-652. Rumelt, Richard 1974 Strategy, Structure and Economic Performance. Boston: HarvardBusiness School. Runciman, W. G. 1972 A Critique of Max Weber's Philosophy of Social Science. Cambridge: Cambridge University Press.

Russell, Bertrand 1948 Human Knowledge, Its Scope and Limits. New York: Simon & Schuster. Simon, Herbert A. 1957 Administrative Behavior. New York: Macmillan. Tawney, R. H. 1932 "The study of economic history." Inaugurallecture at the London School of Economics, 1932. Reprinted in N. B. Harte (ed.), The Study of Economic History: 87-108. London: FrankCass. Teece, David J. 1984 "Multinationalenterprise, internal governance and industrial organization." Working Paper No. 1 B-2, University of California, Berkeley, Center for Research in Management. Thompson, James D. 1967 Organizations in Action. New York: McGraw-Hill. Voltaire, Franqois Marie Arouet 1966 Candide, or Optimism. Translated by Robert M. Adams. New York: W. W. Norton. Vroom, Victor 1964 Work and Motivation. New York: Wiley. Walker, Gordon, and David Weber 1984 "A transaction cost approach to make-or-buy decisions." Administrative Science Quarterly, 29: 373-391. Weber, Max 1958 The Protestant Ethic and the Spirit of Capitalism. New York: Charles Scribner.

White, Harrison 1985 "Agency as control." InJohn W. Pratt and RichardJ. Zeckhauser (eds.), Principals and Agents: The Structure of Business: 187-212. Boston: HarvardBusiness School. Wilkins, Alan, and William G. Ouchi 1983 "Efficientcultures: Exploring the relationship between culture and organizational performance." Administrative Science Quarterly, 28: 468-481. Williamson, Oliver 1971 "The vertical integration of production: Market failure considerations." American Economic Review, 61: 112-127. 1975 Markets and Hierarchies. New York: Free Press. 1979 "Transaction cost economics: The governance of contractual relations." Journal of Law and Economics, 22: 233-262. 1980 "The emergence of the visible hand: Implications for industrial organization." InAlfred D. Chandler and Herbert Daems (eds.), Managerial Hierarchies: 182-202. Cambridge, MA: Harvard University Press. Williamson, Oliver, and William G. Ouchi 1981 "The markets and hierarchies and visible hand perspectives." InAndrew H. Van de Ven and William F. Joyce (eds.), Perspectives on Organization Design and Behavior: 347-370. New York: Wiley.

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