Theory of Ownership清华大学王一江.docx

Theory of Ownership清华大学王一江.docx

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TheoryofOwnership清华大学王一江

TheoryofOwnership

1.Introduction.

i.Theoriesofverticalintegrationareestablishedtounderstandcapitalistinstitutions,suchastheexistenceoffirmswithownershipconcentratedinthehandsofonepartyoranother,alongsidewithmarketmechanism.

Whenappliedtolaborissues,thesetheoriesexplainwhylaborserviceisobtainedthroughanemploymentrelationship（asinafactorysystem）ratherthanarms-lengthsupply-demandrelationship,withtheworkerasanindependentcontractorwhoseservice,or,moreprecisely,producthisservice,ispurchasedwhenitisneeded（asinaputting-outsystem）.Nowadays,therearetwowaysforacomputerprogramwritertoworkforafirm:

asanemployee,oranindependentcontractor.

ii.Differentapproachestounderstandcapitalistinstitutions

a.Classinterests（Marx）

b.Technology（neoclassiceconomics,e.g.,Samuelson）:

thefirmisaproductionfunction.（Productioncosteconomics.）

c.Transactioncost（incontrasttoproductioncost）economicsseesthefirmasagovernancestructure.Capitalistinstitutionshavethemainpurposeandeffectofeconomizingontransactioncosts.Theproblemofeconomicorganizationiscontractingandcontractenforcement.

2.Earlyviewsonintegratedorganizationsinfreemarketeconomies.（Williamson,1985,pp.2-4.）

a.FrankKnight（1922）,Acknowledgedtheimportanceofstudyinghumannatureasweknowit.Heidentifies“moralhazard”asanendemicconditionwithwhicheconomicorganizationmustcontend.

Problem:

“moralhazard”wastootechnicalandmisunderstoodasasimpleissueofpurchasingandsellinginformation.Coase（1952）arguedthatalladviceorknowledgecouldbeboughtasrequired.

b.JohnR.Commons（1934）,economicorganizationisnotmerelyaresponsetotechnologicalfeatures,e.g.,economiesofscaleorscope,butoftenhasthepurposeofharmonizingrelationsbetweenpartieswhoareotherwiseinactualorpotentialconflict.

Problem:

Themessagemadelittleheadwayagainsttheprevailingviewthatthecourtsweretheprincipalforumforconflictresolution.[Q:

Whyinthepasteconomiststendtorefertoconflictproblemstothecourtandthusnotdiscussthem,whereasnowadaystheyaremorewillingtodiscussthem?

]

c.RonaldCoase（1937）,whethertransactionswereorganizedwithinafirm（hierarchically）orbetweenautonomousfirms（inamarket）isadecisionvariable.Whichmodewasadopteddependedonthetransactioncoststhatattendedeach.

Problem:

Unlessthefactorsresponsiblefortransactioncostsareidentified,thereasonsfororganizingsometransactionsonewayandothersanotherwouldnecessarilyremainobscure.

d.FriedrichHayek（1945）,“theeconomicproblemofsocietyismainlyoneofrapidadaptationtochangesinparticularcircumstancesoftimeandplace.”Thisemphasizestheimportanceofutilizingidiosyncraticknowledge.

e.KennethArrow（1959）,“Traditionaleconomictheorystressesthesufficiencyofthepricessystemasasourceofinformation,andthisiscorrectenoughatequilibrium.Inconditionsofdisequilibrium,apremiumispaidfortheacquisitionofinformationfromsourcesotherthanthepricesandquantities”towhichthefirmhasdirectaccess.

Transactioncostisthecostofrunningtheeconomicsystem.

3.VerticalintegrationinOliverWilliamson（1985）.

i.Thebehavioralassumption

Boundedrationality:

peoplesatisfice,notoptimize,duetolimitedcognitivecompetence.Selfinterestandopportunisticbehavior.

iii.Criticaldimensionsfordistinguishingamongtransactions

a.Behavioralassumptions

Tounderstandopportunism,itisimportanttodistinguishbetweenexantevs.exposttransactioncosts.

Exantetransactioncosts:

thoseincurredtodraft,negotiateandsafeguard（e.g.,sharedownership,ruleoflaw）anagreement.

Exposttransactioncoststakeseveralforms:

Maladaptioncostsincurredwhentransactionsdriftoutofalignmentinrelationtothe“shiftingcontractcurve”（Aoki,1983）.

Thehagglingcostsincurredifbilateraleffortsaremadetocorrectexpostmisalignments.

Thesetupandrunningcostsassociatedwiththegovernancestructure.

Thebondingcostsofeffectingsecurecommitments.

b.Generalpurposevs.specialpurposeinvestments.Whilethelatterislikelytobecostsaving,theformerissafer（moreeasilyredeployed）shouldtherebeaninterruptionduringthecontractexecution.“Dotheprospectivecostsavingsaffordedbythespecialpurposetechnologyjustifythestrategichazardsthatariseasaconsequenceoftheirnonsalvageablecharacter?

”（Williamson,p.54.）

Inaccounting,adistinctionismadebetweenfixedandvariablecosts.Forcontractingpurpose,itisimportanttodistinctgeneralpurposeinvestmentfromspecialpurposeinvestment,e.g.,firmspecifichumancapital.

4typesofassetspecificity:

Site,physical,humanasset,anddedicatedassets.

c.Uncertainty（informationalproblems）

Primary:

Statecontingency.

Secondary（behavioral）:

Whatwouldtheotherpartydo?

iii.Contractualimplications

BoundedRationality

Opportunism

Assetspecificity

Contractprocess

0

+

+

planning

+

0

+

Promise

+

+

0

competition

+

+

+

governance

0=doesn’texist;+=exists.

Acognitivemapofcontractcanbedrawnasadeparturefromcompetitivepricemechanisms.

iv.Thefundamentaltransformation.

a）Traditionalthinking:

Thetermsuponwhichaninitialbargainwillbestruckdependonwhethernoncollusivebidscanbeelicitedfrommorethanonequalifiedsupplier.（Monopolyvs.competitivebidding.）

b）Transactioncosteconomicsfullyacceptsthisdescriptionofexantebidding.Butitholdsthataconditionoflargenumbersbiddingattheoutsetdoesnotnecessarilyimplythatalargenumberbiddingconditionwillprevailthereafter.Whetherornotthelargenumberconditionholdsdependsonspecificityofhumanorphysicalassets.Ifassetsarerelationspecific,“whatwasalargenumbersbiddingsconditionattheoutsetiseffectivelytransformedintooneofbilateralsupplythereafter.Thisfundamentaltransformationhaspervasivecontractingconsequences.”（p.61.）

v.Verticalintegrationasasolution.

Theaboveanalysisleadstotheconclusionofverticalintegration.Whenmarketandcontractingbetweentwoindependentpartiescannotofferasatisfactoryandefficientsolutiontothemoralhazardprobleminthebilateralrelationbetweenthetwoparties,thetwopartiesshouldmergeandformasinglefirm.

WhataresomeofthemainproblemsinWilliamson’stheoryofverticalintegration?

EmpiricalchallengetothetheorycomesfromCoase.

Theoreticchallengetothetheoryby

●GroosmanandHart（1986）;and

●HartandMoore（1988）.

vi.Implicationforemploymentrelations.

a）Whyisastablerelationshipbetweenlaborandcapitalnecessary?

-Ithelpstoalleviatevariousbehavioralproblemspervasiveinarms-lengthtransactions,e.g.,pre-contractcheating（adverseselection）,notmakingenougheffort,notrecognizingone’sspecificinvestment,etc.Thisisefficiencyenhancing.

b）Whoshouldhirewhom?

GrossmanandHart（1986）studiedthisquestion.

4.Agametheoreticalmodelwithrelationship-specificinvestment（ThisexampleisfromGibbons,1992）

Model

Players:

BwishestopurchaseaunitofinputfromasellerS.

Timingofevents:

∙Date0,BandSeachmakeaspecificinvestment,IB&IS,respectively.

∙Date1,tradeoccurs.

Technology:

∙Ii,i=B,S,hasonlytwopossiblevalues,H（forhigh）andL（forlow）.Specifically,assumeH=$1.9andL=0.

∙ThevaluesoftradetoBandSdependonthelevelsofinvestmentatdate0andaresummarizedinthetablebelow.Inthetable,thefirstcomponentreferstothebuyer’sbenefitv,andthesecondtotheseller’scostc（atdate1–nottobeconfusedwithISatdate0）.

IB=H

IB=L

IS=H

vb,1=10

cS,1=6

vb,1=9

cS,1=7

IS=L

vb,1=9

cS,1=7

vb,1=6cS,1=10

Exercise:

Calculatenetsocialsurplusundereachsituation.

SS（IS=H,Ib=H）=?

SS（IS=H,Ib=L）=?

SS（IS=L,Ib=H）=?

SS（IS=L,Ib=L）=?

∙Notethattheseller’sinvestmentaffectsnotonlytheseller’scostsbutalsothebuyer’sbenefit,andviceversa.Forexample,bydevelopingagoodseam,acoalminecanprovidebettercoaltoanelectricplantwhileincurringalowervariableproductioncostitself.Similarly,iftheplantinvestsinabetterboiler,itcanburnlowerqualitycoal,thusreducingtheseller’scosts.

Information:

∙IiisobservabletoBandS,butnotverifiableandhencenotcontractible.

∙vandcareprivateinformation.

∙WhetherBacceptedorrejectedtheinputatdate1ispublic（verifiable）information,andsoisthepriceatwhichtheinputisaccepted（ifitisaccepted）.

Exercise:

Ranktheinvolvedvariablesbythequalityofinformation.

Possibleresults:

∙Firstbest:

IB=IS=H,whichgivesatotalsurplusoftrade

10–6–3.8=.2

∙IfIB=IS=L,notrade.

∙IfIB=HandIS=L,orviceversa,totalsurplusis

9–7–1.9=.1

Contractsandfirstbestoutcome:

∙IfIiscontractible,thefirstbestcanbeachievedbyspecifyingIi=Hinthecontract.Pricefortheinputcanbespecified,too,andwouldbeintherange

10–1.9>p>6+1.9.（Note:

p=8wouldwork.）

∙IfqualityandIihaveaone-to-onerelationship,thenthecontractcanalsospecifyqualitytoachievethefirstbest.

Contractsandsecondbestoutcomes:

∙Thecontractcanspecifyanacceptancepricep1（ifBacceptstheinput,p1ispaidtoS）andarejectionpricep0（ifBrejectstheinput,p0ispaidtotheseller）.

∙Givenp1andp0,thesellerhas3options:

1.IS=L=0（noinvestment）,c=0（noproductionofanythinggood）,toreceivep0;

2.IS=0,c=7,toreceivep0orp1,