The Costs of Organization
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Transcript of The Costs of Organization
The Costs of Organization
Scott E. Masten James W. Meehan, Jr. Edward A. Snyder
Presented by Carla Fernández-Corrales, Fall 2013
Journal of Law, Economics, & Organization, Vol. 7, No. 1. (Spring, 1991), pp. 1-25.
University of Michigan Colby College University of Michigan (currently at Yale School of
Management)
Overview
• Problem for empirical research : Unobservability of transaction costs.• Indirect tests are unable to distinguish between
market and internal transaction costs.• The article focuses on the role of internal
organization costs. • Econometric methods are applied to analyze a large
naval construction project• The nature of data allowed them to isolate the
effects of transaction on the costs of organizing and to provide dollar estimates.
Hypothesis
• Criticism:• Latent costs: for example inflexibility• Unquantifiable costs: loses due to withholding of information
Institution chosen
Internal organization
Market exchange
Costs of each alternative
Reduced-Form Analysis
• Probability of observing
• Resulting estimates provide only ordinal measures of the costs• If X and Z have common elements, only the difference between
and can be determined.
X, Z: vectors of attributes , : vectors of coefficients e, u: normally distributed random variables
Direct tests
• Regression techniques yield dollar estimates of the costs of organization• Regression estimation can identify the
magnitude of the coefficients to perform test of hypotheses.
General hypotheses
Empirical setting: naval shipbuilding
• Final product large, discrete, and immobile during most of its fabrication• Assembly must proceed in order• Buffer inventories are impractical• High complexity• High human asset specificityy• Physical assets are less specific• Mainly involves low technology, labor intensive
activities.
Specific Hypotheses
Data
Data
Empirical results
Empirical results
Discussion
• Temporal specificity can be a major determinant of organization.• Integration occurs for relation specific human
capital and very complex components, but the incentive comes from the internal costs rather than market costs.• Relationship specific physical assets reduces the
costs of governance.• The firm is more likely to integrate engineering
intense activities and more likely to internalize labor intense activities.
Discussion
• The independent variables have their principal influence on costs of internal organization.• Effects of engineering.• Need to know the industry under study.• Implications of changes in regulations.• Idiosyncrasies of shipbuilding must be taken into
consideration.