the transactions cost approach to vertical integration an empirical examination the transactions cost approach developed by coase and williamson provides a coherent framework for investigating the determinants of vertical integration in different industries empirical implications are developed and then tested using a cross section of firm level data pooled over different time periods the results tend to confirm hypotheses regarding the internal costs of management small numbers bargaining problems and the notion of the firm as suited to adaptive sequential decision making under conditions of uncertainty it rhile there exists an extensive literature on vy theoretical rationales for vertical integration surprisingly little is known about the importance of the different theories the empirical literature includes two types of studies case studies test the applicability of a particular theory to a single firm or industry e g armour and teece 1980 perry 1980 or monteverde and teece 1982a they are susceptible to bias in their choice of industry and the generality of their results cannot be established another category of studies examines a broad base of industries to determine the relationship between vertical integration and such variables as industry concentration average firm size and sales growth e g adelman 1955 gort 1962 and tucker and wilder 1977 the link between these studies and theories of vertical integration is generally left unclear 2 this study will adopt the strategy of investigating a broad base of industries but unlike earlier studies of this type will test empirical implications following from the transactions cost approach 3 this approach as developed by coase 1937 and williamson 1975 1979 provides a coherent framework for investigating determinants of vertical integration over different industries furthermore williamson has persuasively argued that transactions cost considerations underlie such prominent reasons for vertical integration as the elimination of monopoly distortions technical complementarities supply reliability and economies in the acquisition of information the transactions cost approach is summarized and implications are developed in the first section of this paper the implications are tested using firm level data pooled over time the empirical model is presented in the second section and the results are presented in the third section the model incorporates variables not included in previous studies of vertical integration such as measures of market risk and organizational structure the results tend to confirm hypotheses regarding internal costs of management small numbers bargaining problems and the notion of the firm as an institution suited to adaptive sequential decision making a summary of the results and conclusions are contained in the final section i the transactions cost approach arrow 1969 has defined transactions costs as the cost of organizing the economic system in attempting to translate this idea into a framework for explaining the organization of economic activity williamson and others have focused on the role of opportunism and the limited capability of individuals in processing information the choice of institutional alternative depends on minimizing the costs which arise in the presence of transaction specific investments and uncertainty while a wide variety of institutional alternatives exist a simple dichotomy is adopted here for the sake of tractability following coase transactions are classified according to whether they take place in the firm or across markets market alternatives become hazardous in recurring exchanges involving transaction specific capital and efficient information processing the firm then provides a received for publication november 21 1983 revision accepted for publication december 3 1984 rutgers university this paper is based on my dissertation i would like to thank my committee armen alchian harold demsetz david mayers fred weston and my chairman benjamin klein for their helpful comments recent versions of the paper also benefited from comments made by k chung d carlton d kaserman and anonymous referees i would also like to thank participants of the transactions cost workshop at the university of pennsylvania the usual disclaimer applies 1 recent summaries of the theoretical literature on vertical integration are in warren boulton 1978 and kaserman 1978 see levy 1981 1984 for discussion of this problem 3earlier studies by armour and teece 1980 and monteverde and teece 1982 a b have successfully employed the transactions cost approach to examine vertical integration in particular industries this study differs in that it adopts the transactions cost approach to test implications across industries

vertical integration and transaction specific sunk costs abstract the purpose of this paper is to analyze vertical integration long term contracts and spot markets as institutional alternatives when transaction specific investments are involved firm activities are divided into two periods in the first period the ex ante world decisions on the amount of transaction specific sunk costs are made whereas after realization of a random state of the world short run production decisions are made in the ex post world the problem analyzed is to determine what form of organizations and or contracts will emerge between upstream and downstream firms in the ex ante world to regulate their ex ante transaction specific investments if any as well as their ex post production decisions and the distribution of resulting profits

the proportional shapley value and applications abstract we study a non linear weighted shapley value shapley 1953b for cooperative games with transferable utility in which the weights are endogenously given by the players stand alone worths we call it the proportional shapley value since it distributes the harsanyi dividend harsanyi 1959 of all coalitions in proportion to the stand alone worths of its members we show that this value recommends appealing payoff distributions in several applications among which a land production economy introduced in shapley and shubik 1967 although the proportional shapley value does not satisfy the classical axioms of linearity and consistency hart and mas colell 1989 the main results provide comparable axiomatic characterizations of our value and the shapley value by means of weak versions of these two axioms these characterizations rely on another result which states that there exists a unique extension of a value defined on games that are additive except possibly for the grand coalition to the set of all games in the much larger class we consider moreover our value inherits several well known properties of the weighted shapley values

valence politics and equilibrium in spatial election models spatial models of two party or two candidatecompetition almost never have pure strategy nashequilibria when the issue space has more than onedimension this paper shows that the introduction ofvalence issues can create conditions where equilibriaexist even in a multidimensional setting we derivesufficient conditions for the existence of equilibria and characterize the spatial locations of twocompeting parties or candidates when such equilibriaexist the party with the advantage on the valencedimension will generally take a moderate position onthe positional issues we consider the implications ofthese results for public perceptions of the parties incumbency advantages and realigning elections

measurement of vertical integration an index of vertical integration is constructed as a tool to examine how the average level of vertical integration has changed over time the hypothesis that if vertical integration can lower costs or reduce risks more firms will integrate vertically is subjected to an empirical test using the vertical industry connection index a randem sample of firms is selected from the compusat data base the results support the contention that vertical integration has increased in contrast with laffer s findings 17 references 10 figures 3 tables

the axiomatic approach to three values in games with coalition structure we present a unified framework for a broad class of values in transferable utility games with coalition structure including the owen coalitional value and two weighted versions with weights given by the size of the coalitions we provide three axiomatic characterizations using the properties of efficiency linearity independence of null coalitions and coordination with two versions of balanced contributions inside a coalition and weighted sharing in unanimity games respectively

the statistical analysis of roll call data modern studies of legislative behavior focus upon the relationship among the policy preferences of legislators institutional arrangements and legislative outcomes in spatial models of legislatures policies are represented geometrically as points in a low dimensional euclidean space each legislator has a most preferred policy or ideal point in this space and his or her utility for a policy declines with the distance of the policy from his or her ideal point see davis hinich and ordeshook 1970 for an early survey the primary use of roll call data the recorded votes of deliberative bodies 1 is the estimation of ideal points the appeal and importance of ideal point estimation arises in two ways first ideal point estimates let us describe legislators and legislatures the distribution of ideal points estimates reveals how cleavages between legislators reflect partisan affiliation or region or become more polarized over time e g mccarty poole and rosenthal 2001 roll call data serve similar purposes for interest groups such as americans for democratic action the national taxpayers union and the sierra club to produce ratings of legislators along different policy dimensions second estimates from roll call analysis can be used to test theories of legislative behavior for instance roll call analysis has been used in studies of the u s congress both contemporary and

imperfectly informed voters and strategic extremism we analyze a two candidate downsian model considering that voters use shortcuts e g interest group media endorsements to infer candidates policy platforms that is voters do not observe candidates exact platforms but only which candidate offers the more leftist rightist platform relative positions in equilibrium candidates behavior tends to maximum extremism but it may converge or diverge depending on how voters behave when indifferent policywise between the candidates when the tie breaking rule used by the voters is sufficiently fair candidates converge to the extreme preferred by the median voter but when it strongly favors a certain candidate each candidate specializes in a different extreme

make buy or ally a transaction cost theory meta analysis since the publication of williamson s markets and hierarchies many empirical articles have investigated the tenets of transaction cost theory using meta analytic techniques we quantitatively syn

sunk investment bargaining and choice of capital structure this paper shows how a firm might optimally choose debt to affect the outcome of bilateral bargaining with workers or other input suppliers it is shown that debt may alleviate the well known underinvestment problem associated with the inability to write precommitment contracts also in such circumstances debt could be pareto improving over complete equity financing the relationship between the optimal level of debt and asset specificity of investment and bargaining power of the firm vis a vis the workers is explored the williamson conjecture that higher asset specificity will lead to less debt is shown not to be valid in general

extremist platforms political consequences of profit seeking media we analyze how information about candidate quality affects the choice of electoral platforms made by an office motivated political challenger the incumbent is of known quality and located at the ideal policy of the voter the voter cares for both policy and the candidates quality and can learn about the challenger s quality by buying information a high quality challenger then has an incentive to signal her quality by choosing a policy that induces the voter to buy information we first study the benchmark case in which the information is supplied exogenously and its quality is independent of the challenger s platform this yields multiple equilibria and indeterminacy of equilibrium platforms by contrast when the information is supplied by a profit maximizing media outlet its quality depends on the challenger s platform and we obtain a unique equilibrium platform in particular when the incumbent s quality is relatively low the media coverage rises and the challenger s platform diverges further from the voter s ideal policy as the voter s preference for quality increases

modeling process switching decisions under product life cycle uncertainty abstract we address the process switching decision of a firm that adopts a mixed process strategy with respect to a new product in the context of product life cycle uncertainty a mixed process strategy uses a flexible process in the early stages of the product s life cycle and later switches to a dedicated process to gain cost economies we present a model that captures uncertainty through alternative life cycle demand functions to guide the process switching decision we develop a dynamic decision rule that can be used with any uncertainty resolution scheme and demonstrate its application and robustness using an illustrative numerical example

policy positions information acquisition and turnout this paper explores the relationship between policy positions information acquisition and turnout in particular information acquisition and turnout choices are characterized as a function of citizens policy positions it is found that middle of the road citizens are the most likely to both acquire political information and abstain comparative statics analysis of the information technology indicates that an increase in the effectiveness of information has a higher positive impact on information and turnout than a comparable decrease in the cost of information furthermore following a polarization information and abstention are found to increase

the role of asset specificity in the vertical integration decision abstract according to the logic of transaction cost economics several factors determine the most efficient form of economic organization these factors include uncertainty and frequency of transactions involving the transfer of goods or services although the most important factor is asset specificity these characteristics of transactions engender high transaction costs but they also parallel the conditions under which the sunk cost effect is most likely to be observed the potential influence of sunk cost considerations in the choice of corporate governance structure is illustrated with respect to vertical integration and was tested in a laboratory study in which subjects were asked to play the role of a firm s chief strategist the results support the view that asset specificity drives vertical integration but for reasons that may have little to do with transaction cost economizing

corporate risk management and the incentive effects of debt this paper demonstrates how the incentive of manager equityholders to substitute toward riskier assets commonly referred to as the asset substitution problem is related to the level of observable risk in the firm when observable and unobservable risks are sufficiently positively correlated increases decreases in observable risk generate the incentive for manager equityholders to increase decrease unobservable risk thus credible commitments to hedge observable risk can benefit the firm s manager equityholders by reducing the incentive to shift risk and the associated agency cost of debt this provides a positive rationale for hedging diversifiable risk at the firm level in the last few years a sizeable literature has emerged which is devoted to explaining how shareholders can benefit from hedging undertaken by the firm such hedging may include the purchase of insurance the use of financial futures and options and even diversification at the level of the firm four lines of reasoning have been pursued in the literature smith and stulz 1985 and campbell and kracaw 1987 rely on the fact that under optimal contracting between managers and shareholders managers are less diversified than are shareholders hedging by the firm which reduces the manager s exposure to risk can improve on the optimal compensation contract between the manager and equityholders this argument may be applied to a firm with any capital structure or any degree of leverage the other arguments apply to firms which are financed with risky debt smith and stulz show that hedging may be useful in reducing expected bankruptcy costs they also show as does macminn 1985 that hedging by the firm may reduce the probability that depreciation tax shields may be lost due to financial distress finally diamond 1984 has shown that monitoring costs may be reduced through diversification macminn s result is of particular interest part of his analysis is based on an earlier paper by green and talmor 1985 which demonstrates that the equityholders of a levered firm will have an incentive to underinvest in risky assets if the firm cannot capture its interest and depreciation tax shields with certainty in green and talmor s analysis the firm has no mechanism to reduce or hedge the uncertainty surrounding its tax shields other than to alter its investment decisions however as macminn argues if the firm is allowed to hedge its risks

sunk costs and cartel formation theory and application to the dyestuff industry we first develop a simple model of entry showing that cartels are more likely to emerge during periods of downturns and in industries with significant sunk costs cartel formation is also accompanied by a decline in profits we then use the framework to investigate the emergence of the swiss dyestuff export cartel during the inter war period and find empirical evidence that supports the main predictions of the model the analysis indicates that sunk costs and entry may be important determinants of cartel formation and are complementary to the traditional cartel stability conditions

sharing costs in highways a game theoretic approach this paper introduces a new class of games highway games which arise from situations where there is a common resource that agents will jointly use that resource is an ordered set of several indivisible sections where each section has an associated fixed cost and each agent requires some consecutive sections we present an easy formula to calculate the shapley value and we present an efficient procedure to calculate the nucleolus for this class of games

a model of candidate location when one candidate has a valence advantage that under some fairly weak assumptions for all levels of the valence advantage the advantaged candidate chooses a more moderate position than the disadvantaged candidate empirical studies of congressional elections by fiorina 1973 and ansolabehere snyder and stewart 2001 support this result d owns 1957 seminal work presents a puzzle for scholars of u s elections why do candidates not converge to the median voter one of the best explanations is that the candidates themselves have ideological preferences as calvert 1985 and wittman 1977 1983 have shown when candidates have such preferences and they are sufficiently uncertain about the preferences of the median voter then they do not converge although they may moderate their positions from their ideal point the basic version of the calvert wittman model however does not account for another basic fact of u s elections often one of the candidates has an advantage due to a nonpolicy factor such as incumbency greater campaign funds better name recognition superior charisma superior intelligence and so on stokes has dubbed such factors valence factors and he has noted their importance in u s elections stokes 1963 1992 1 in this article i extend the basic calvert wittman model by giving one candidate a valence advantage over the other i show that if the valence characteristics of the candidates are approximately equal then when a candidate s valence advantage increases this causes her to move toward the

on the behavioral and rational foundations of economic dynamics abstract existing uncertainties about the correct explanations for economic growth and business cycles cannot be settled by aggregative analysis within the neoclassical framework current disputes in theory rest largely on ad hoc casually empirical assumptions about departures from perfect rationality under uncertainty such disputes can only be settled by painstaking microeconomic empirical study of human decision making and problem solving microeconomic research of the kinds that are required can receive powerful guidance from the theories of human thinking that have been developed and tested over the past twenty five years by cognitive psychologists

buyer supplier relations in industrial markets when do buyers risk making idiosyncratic investments it is well established that the existence of investments specific to a relationship influences the choice of governance structure including the use of contractual safeguards what is less well understood are the circumstances leading to the creation of those specific assets to begin with this paper explores the industrial buyer s motives to put itself at risk by making investments tangible and intangible which cannot be readily redeployed from one supplier to another using original data from a sample of 388 supply relationships involving all automakers in the u s and japan we examine features of the supply task the supplier and the supply environment which serve as motives to make supplier specific investments we also examine potential factors which facilitate the posting of specific assets as credible commitments to attenuate supplier opportunism we find that specific investments by buyers serve as a mechanism to 1 increase coordination when the manufacturing task is complex 2 buffer the buyer against technological uncertainty and 3 build close relationships when the requisite production skills are scarce the supply market is thin we find more specific investments in supply arrangements that are embedded in a broader business relationship we find fewer supplier specific investments in the japanese context finally we find that buyers focus their investments on lesser known low share component makers perhaps to capitalize on a unique focused supplier capability

candidate valence evidence from consecutive presidential elections this article develops and estimates a dynamic spatial model of voting the distribution of voters policy positions and candidates valence are recovered using individual level data on voting decisions in two consecutive presidential elections the estimated model is used to provide an equilibrium interpretation of observed individual voting profiles and aggregate electoral outcomes as well as to conduct counterfactual experiments that assess the impact of candidates policy positions valence and voters information on electoral outcomes

voters private valuation of candidates quality abstract different voters might have different valuations of candidates qualitative features we argue that this intuitive fact acts as a strong stabilizing force in electoral competition dynamics when candidates are office motivated pure strategy equilibria may exist unlike when all voters favor the same candidate perhaps more importantly it affects candidates platform moderation incentives in a rather intriguing manner when voters are evenly split in terms of their candidates quality valuations then both candidates have incentives to locate sufficiently near but not necessarily exactly at the center of the policy space however as the number of voters who favor the same candidate rises maximum equilibrium differentiation follows a non trivial u shaped pattern it is first decreasing and then increasing in the fraction of voters who prefer the more popular candidate

a structural model of turnout and voting in multiple elections this paper develops a unified approach to study participation and voting in multiple elections the theoretical setting combines an uncertain voter model of turnout with a spatial model of voting behavior we apply our framework to the study of turnout and voting in u s presidential and congressional elections we structurally estimate the model using individual level data for the 2000 elections and quantify the relationships between observed individual characteristics and unobserved citizens ideological preferences information and civic duty we then use the estimated model which replicates the patterns of abstention selective abstention split ticket voting and straight ticket voting observed in the data to assess the effects of policies that may increase citizens information and sense of civic duty on their turnout and voting behavior

efficient sourcing and debt financing in imperfect product markets supplier relations play an important role in determining a firm s product market strategy and position by affecting the cost and quality of the product produced by the firm these relations are especially significant because the cost of purchased materials for an average firm is more than half its total sales in this paper we model the adverse incentives of a firm that sources from a competitive supplier industry we show that a firm s propensity to behave opportunistically towards its suppliers raises the firm s input costs by decreasing the number of suppliers servicing it this results in a suboptimal production decision compared to the firm s first best choice we argue that an appropriate level of debt financing alters the shareholder incentives and mitigates the hold up problem further we also show that at the optimal debt level the firm produces its first best level of output

the dynamics of make or buy decisions abstract make or buy decisions are strategically important for business firms particularly when production and marketing of components involves specialized technology and assets recent theories of make or buy decisions compare the cost of administering transactions inside a firm and across markets in this paper we extend these theories to a dynamic market in which profit from the use of specialized assets declines over time due to entry and substitution of technology using optimal control theory we investigate the patterns of vertical integration under different parametric conditions we also prevent empirical evidence from time series and cross sectional data that lend support to the analytical results from the model

the un predictability of primaries with many candidates simulation evidence it is common to describe the dynamic processes that generateoutcomes in u s primaries as unstable or unpredictable in fact the way we choose candidates may amount to alottery this paper uses a simulation approach assuming10 000 voters who vote according to a naive deterministicproximity rule but who choose party affiliationprobabilistically the voters of each party then must choose between twosets of ten randomly chosen candidates in closed primaries finally the winners of the two nominations compete in thegeneral election in which independent voters also participate the key result of the simulations reported here isthe complete unpredictability of the outcomes of a sequence ofprimaries the winner of the primary or the party s nominee varied as much as two standard deviations from the medianpartisan voter the reason is that the median or any othermeasure of the center of the distribution of voters isof little value in predicting the outcome of multicandidateelections these results suggest that who runs may havemore to do with who wins than any other consideration if more than two parties or candidates are expected then thevote maximizing position is not close to your opponents butwell away from them tullock 1967 55

excess capacity as a commitment to promote entry this paper studies dominant firms incentives for holding capacities in excess of their production requirements the explanation most frequently put forward is to view behaviour of this kind as an attempt to set up barriers to entry as emphasized by spence 1977 holding excess capacity is a relatively effective form of entry deterrence it has the great advantage of constituting a credible threat to potential entrants because a large fraction of capacity costs are usually irreversible the view that holding excess capacities constitutes a form of anticompetitive behaviour has to be qualified however part of the motivation for holding them may well be of a more benign nature many large firms maintain economic relations with other smaller upstream or downstream companies quite often they make up a considerable part of these companies total activities the companies usually have to invest certain specific sunk costs into their relationship with the dominant firm before deciding on these sunk investments they will often like to have some assurance that the dominant firm will not behave opportunistically once these sunk costs have been incurred by opportunistic behaviour we mean a strategy whereby the dominant firm reduces the quantity it demands or supplies at any given price to such an extent that the companies can no longer obtain an economic rate of return on their sunk investments in the absence of long run contracts a dominant firm s decision to invest into excess capacities may well be an effective means to give the upstream or downstream firms the assurance they require the essential message is thus as follows rather than or in addition to being a threat to potential entrants excess capacity held by a dominant firm may also constitute a promise to upstream suppliers or downstream retailers they constitute an effective promise to buy or supply a sufficiently large quantity at any given price to ensure that the upstream or downstream firm

policy divergence and voter polarization in a structural model of elections abstractone of the most widely discussed phenomena in american politics today is the perceived increasing partisan divide that splits the u s electorate a contested question is whether this diagnosis is actually true and if so what the underlying cause might be we propose a new method that simultaneously estimates voters preferences and parties positions on economic and cultural issues we apply the model to u s presidential elections between 1972 and 2008 the model recovers candidates positions from voters behavior and decomposes changes in the overall political polarization of the electorate into changes in the distribution of voters ideal positions voter radicalization and consequences of elite polarization sorting

solidarity within a fixed community we study the consequences of a solidarity property that specifies how a value for cooperative games should respond if some player forfeits his productivity i e becomes a null player nullified solidarity states that in this case either all players weakly gain together or all players weakly lose together combined with efficiency the null game property and a weak fairness property we obtain a new characterization of the equal division value