By Oliver E. Williamson
New York: The Free Press
A division of Macmillan, Inc. 1985
ISBN 0-02-934821-8

Since the publication of Oliver Williamson's modern classic Markets and Hierarchies in 1975, transaction cost economics has emerged as a viable and robust approach for studying economic organization.
Viewing corporations not as production functions but as governance structures, its theory focuses on negotiating, executing, modifying, and renewing the myriad contractual agreements--formal and informal--by which firms seek to economize on the cost of transacting business.

Now, in this long-awaited sequel to Markets and Hierarchies, Williamson develops and extends the transaction cost approach, applies it to a range of economic institutions, and probes its implications for public policy-- including its potential influence on antitrust and merger guidelines, labor policy, and SEC and public utility regulations. His comparative institutional analysis consistently ties questions of economics directly to those of organizational theory and contract law.

Williamson begins with an overview of transaction cost economics and its behavioral assumptions. He also sets forth two crucial--and closely related-- principles: asset specificity, which refers to investments that are highly specialized and can be re-deployed only by greatly sacrificing productive value, and the "Fundamental Transformation," in which the initial winner of a bidding competition thereafter enjoys an advantage over rival suppliers because of its ownership of or control over transaction specific assets.

Next, Williamson discusses vertical integration, showing that it may often result not from technological determinism or the desire for monopoly power but from a pragmatic concern for mitigating the contractual hazards of the Fundamental Transformation. (The transaction cost hypothesis not only predicts selective vertical integration but its results are borne out by the data.) Then, demonstrating that the size of a firm has boundaries imposed by incentive and bureaucratic limits, he returns to the uses of nonstandard contracting to achieve lasting commitments between buyer and supplier. While it was earlier believed that such contracting practices were contrary to sound public policy, he argues persuasively that many nonstandard arrangements "serve legitimate transaction cost economizing purposes."
Finally, Williamson extends the transaction cost model to the organization of work and labor as well as to that of the corporation itself. First establishing that hierarchy can be responsible for comparative organizational economies, he examines the governance structures suited to firms with both specific and nonspecific human assets. He also traces the evolution of the corporation from its traditional unitary form to its modern, multidivisional form, and explores the governance needs met by the corporate board of directors. Concluding chapters analyze regulation in the context of franchise bidding for natural monopoly, and summarize anti trust issues.

Throughout, Williamson contends that an accurate assessment of the economic institutions of capitalism cannot be made without recognizing the central importance of transaction cost economizing and its emphasis on organizational (as opposed to technological) features as well as efficient (as opposed to monopolistic) practices. For economists, specialists in organizational theory, and attorneys in contract, corporate, antitrust, or labor law, it provides a wealth of dramatic insights into economic organization available in no other single volume of its kind today.

About the Author:
Oliver E. Williamson is Edgar F. Kaiser Professor of Business; Professor of Economics; and Professor of Law at the University of California at Berkeley. A former Special Economic Assistant to the Antitrust Division of the U.S. Department of Justice, he is a Fellow of the Econometrics Society and the American Academy of Arts and Sciences and a member of the National Academy of Sciences. He is also Co- editor of the Journal of Law, Economics, and Organization. In addition to Markets and Hierarchies (also published by The Free Press), his other books include The Mechanisms of Governance (Oxford University Press, 1996).


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Updated May 16, 1996
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