MAKE-OR-BUY THEORIES: WHERE DO WE STAND?

The aim of this paper is to discuss the state-of-the art and the directions for research on the make-orbuy problem. After thirty years of research efforts, we now have numerous contributions explaining different aspects of the nature and existence of the firm. The search for a unified theory, however, still remains, at a theoretical level, a challenge. The task is not easy, perhaps because the theory of the firm develops along two different strands, one analyzing the factors influencing the boundaries, and the other one relating to the internal structure; or because, even inside the same research strand, it is not really easy to grasp the similarities and differences between contributions that have followed one another in rapid succession over the last few years. This paper examines the theories concerning the make-or-buy problem, focusing on recent contributions that have tried to develop a unified framework and emphasizes the role of incomplete contracts as a common and significant trait of the theories discussed

Learning and Governance in Inter-Firm Relations

This paper connects theory of learning with theory of governance, in the context of inter-firm relations. It recognizes fundamental criticism of transaction cost economics (TCE), but preserves elements from that theory. The theory of governance used incorporates learning and trust. The paper identifies two kinds of relational risk: hold-up and spillover. For the governance of relations, i.e. the control of relational risk, it develops a box of instruments which includes trust, next to instruments derived and adapted from TCE. These instruments are geared to problems that are specific to learning in interaction between firms. They also include additional roles for go-betweens.transaction cost economics;trust;inter-organizational learning

Regional monopoly and interregional and intraregional competition: the parallel trade in Coca-Cola between Shanghai and Hangzhou in China

This article uses a “principal-agent-subagent” analytical framework and data that were collected from field surveys in China to (1) investigate the nature and causes of the parallel trade in Coca-Cola between Shanghai and Hangzhou and (2) assess the geographic and theoretical implications for the regional monopolies that have been artificially created by Coca-Cola in China. The parallel trade in Coca-Cola is sustained by its intraregional rivalry with Pepsi-Cola in Shanghai, where Coca-Cola (China) (the principal) seeks to maximize its share of the Shanghai soft-drinks market. This goal effectively supersedes the market-division strategy of Coca-Cola (China), since the gap in wholesale prices between the Shanghai and Hangzhou markets is higher than the transaction costs of engaging in parallel trade. The exclusive distributor of Coca-Cola in the Shanghai market (the subagent) makes opportunistic use of a situation in which it does not have to bear the financial consequences of the major residual claimants (the principal and other agents) and has an incentive to enter the nondesignated Coca-Cola market of Hangzhou by crossing the geographic boundary between the two regional monopolies devised by Coca-Cola. The existence of parallel trade in Coca-Cola promotes interregional competition between the Shanghai and Hangzhou bottlers (the agents). This article enhances an understanding of the economic geography of spatial equilibrium, disequilibrium, and quasi-equilibrium of a transnational corporation's distribution system and its artificially created market boundary in China

Governance: Who Controls Matters

In this paper, we provide an outlook for further research on the topic of governance. We review four different approaches on the theory of the firm and discuss implications for governance, namely; nexus of contracts / agency theory, property rights / incomplete contracts, adaptation, and nexus of specific investments.governance, property rights, adaptation, nexus of contracts

Hierarchies, relational contracts and new forms of outsourcing.

We observe that economic restructuring is significantly changing organizational governance. On the one hand, we witness an increase in mergers & acquisitions, which substitutes markets for hierarchies and, on the other hand, we see an increase in outsourcing and subcontracting activities, appearing to replace hierarchies by markets. However, there is evidence that an increasing part of outsourcing activities mix hierarchies with market forms of governance. The key argument of this paper is that firms have established governance structures based on markets, hierarchies and self-enforcing relational contracts so that they are able to keep a substantial amount of control despite of sourcing out labour. Furthermore, we argue that such hierarchical forms of outsourcing produce dependency. Using empirical evidence of the Austrian insurance industry, it is demonstrated that dependency is created, firstly, by the contractual restriction of alternative uses of resources, secondly, by support measures that bind the upstream party closely to the downstream party, thirdly, by relationship-specific investments made by the upstream party, and fourthly, by authority elements.

Eliminating opportunism using an epistemic mechanism

Opportunism is a behavior that takes advantage of knowledge asymmetry and results in promoting agents' own value and demoting other agents' value. It is important to eliminate such a selfish behavior in multi-agent systems, as it has undesirable results for the participating agents. However, as the context we study here is multi-agent systems, system designers actually might not be aware of the value system for each agent thus they have no idea whether an agent will perform opportunistic behavior. Given this fact, this paper designs an epistemic mechanism to eliminate opportunism given a set of possible value systems for the participating agents: An agent's knowledge gets updated so that the other agent is not able to perform opportunistic behavior, and there exists a balance between eliminating opportunism and respecting agents' privacy

Transaction Costs, Innovation and Learning

transaction costs;innovation;learning;inter-organizational relations;networks

Delegation, Knowledge Integration, and Cooperation: How to Solve Problems of Coordination in Structural Fund Programs. Findings From Comparative Case Studies in the South of Italy

European cohesion policies are increasingly relying on grassroots networks tapping into tacit knowledge and participatory decision-making processes. Regional governments delegate their decision making power to local institutions with the assumption that local agents possess both contextual knowledge and political legitimacy to integrate different policy measures in a cooperative fashion. Delegation of decision making power is therefore presumed to minimize the unintended or conflicting outcomes emerging, for instance, when environmental protection and infrastructure building are not designed consistently to local contextual needs nor are these pursued through a cooperative effort of local networks of actors. Different agents, including resource users and government agencies try to work together to resolve shared dilemmas of coordination, as an increasingly common alternative to centralized institutions. Coordination consists of managing interdependencies among multiple individuals or organizations involved in the overall program or project management. Several studies classify different types of coordination mechanisms, including standards, hierarchy, targets or plans, slack resources, vertical information systems, direct contact, liaison roles, task forces, and integrating roles. Other ways of classifying coordination include formal impersonal, formal interpersonal, and informal interpersonal; non-coordination, standards, schedules and plans, mutual adjustment, and teams; task-task, task-resource, and resource-resource coordination; vertical and horizontal coordination; coordination by programming and by feedback; and coordination by standards, plans, and mutual adjustment. Building upon a current field research in four regions of the South of Italy, this paper examines how coordination occurs across local development programs, which are embedded within multilevel governance structures and relations. The paper presents a number of cases of local collaborations in which large numbers of local actors representing a wide range of contending groups have, with the help of mediating institutions, worked out agreements for integrating development programs. In some circumstances, specific coordination mechanisms encouraged consensus building offering all relevant groups the knowledge and skills needed to participate in these negotiations. In other circumstances, though, delegation of decision making power opened the door for opportunistic participation, lacking vision and trust for mutual cooperation.

How does the franchisor’s choice of different control mechanisms affect franchisees’ and employee-managers’ satisfaction?

Satisfaction of franchisees and employee-managers affects the overall performance of a franchise system. We argue that different actors in the same franchise system need to be treated in different ways. The franchisor’s choice of control mechanisms affects the satisfaction of franchisees and employee-managers differently. Drawing on data from the largest German franchise system, we show that the effectiveness of different control mechanisms depends on actor type and experience. Outcome control leads to higher satisfaction among franchisees and employee-managers, while behavior control enhances employee-managers’ satisfaction. Thereby, outcome control leads to higher satisfaction among more experienced franchisees, while behavior control enhances both highly and lowly experienced employee-managers’ satisfaction. Our results suggest that franchisors face a dilemma: On the one hand, behavior control is associated with high costs and has no impact on franchisees’ satisfaction at all. On the other hand, it might still be necessary to prevent franchisees from behaving opportunistically

Foundational Economic Theories for Political-Scientific Inter-Branch Studies

Economic theories are increasingly popular in political science, and in particular in research on the relations between the legislative, the executive, and the judicial branches of government. Among these theories, principal-agent (´PA´) and transaction cost economics (´TCE´) feature particularly high in our research agenda. Yet, pushed by the view that "the content of ´science´ is primarily the methods and rules" (King et al. 1994: 9), and working with limited resources, political scientists have tended to neglect careful theorizing. PA and TCE are taken off-the-shelf without much prior scrutiny, and past conceptual mistakes are perpetuated. This paper aims at introducing and explaining the real PA, positive agency, TCE, and incomplete contracts theories for the purposes of political analysis. In a companion paper, I show the serious mistakes perpetuated by political scientists, and I argue that, faced with a choice between those four economic theories, we should place our bets on a revised version of TCE.Theory of delegation, political science, principal-agent models, transaction costs economics