contract enforcement and trade liberalization in mexico s footwear industry abstract the wave of formal legal system reforms sweeping developing countries provides only a partial solution to the problem of enforcing agreements between firms informal institutions govern the majority of interfirm transactions economic reform also necessitates changes in these institutions this paper examines the evolution of contract enforcement in the mexican footwear industry as trade barriers were removed in the closed economy geographic agglomeration of manufacturing allowed the manufacturers trade associations to maintain information about the behavior of retailers and gave retailers strong incentives to maintain reputations by providing an alternative source for procurement trade liberalization weakened the power of manufacturers

electricity fuel contracting relationships with coal and gas suppliers the growth of competition in the electricity generation industry along with changes in natural gas and coal regulation have led to renewed interest in the nature of efficient transactional arrangements for procuring coal and gas this study examines the evolution of major influences on the incentives for choosing among different transactional forms we find that the asset specificity hypothesis continues to be an important explanation for transactional arrangements in fuel acquisition the degree of asset specificity in a fuel supply arrangement is a function of technological factors of inherent market characteristics and of regulatory rules the expanding role of more flexible fuel supply arrangements in gas and to a lesser extent coal markets is a natural response to current regulatory and technological trends

the control of technology alliances an empirical analysis of the biotechnology industry we examine the determinants of control rights in biotechnology alliances through three case studies and a quantitative analysis aghion and tirole 1994 argue that control rights will be assigned so as to maximize the value of the final output as long as the r d firm has sufficient financial resources consistent with this framework the allocation of control rights to the r d firm increases with the firm s financial resources the empirical evidence regarding the relationship between control rights and the stage of the project at the time the alliance is signed is more ambiguous

price adjustment in long term contracts the case of coal in two recent papers i examined the effects of relationship specific investment on the duration of contracts negotiated between electric utilities and coal suppliers that work demonstrated that when relationshipspecific investment is important for a cost minimizing supply relationship contracts are frequently utilized that specify ex ante the terms and conditions of trade over many future years in this article i examine the characteristics of the price adjustment provisions specified in these long term coal contracts i utilize a sample of about 250 coal contracts to analyze the structure of formal price adjustment provisions in coal contracts in order to determine the factors that affect initial negotiated contract prices and to examine actual transaction price behavior over time there has been much recent theoretical work as well as some related empirical work that has focused on the benefits of long term contracts when relationship specific investments are important 2 there has also been some theoretical work that focuses on the contractual arrangements that may be chosen to mitigate opportunism problems and guard against

subcontractors for tractors theory and evidence on flexible specialization supplier selection and contracting abstract buyer seller networks are pervasive in developing economies yet remain relatively understudied using primary data on contracts between the largest tractor assembler in pakistan and its suppliers we find large variations in prices and quantities across suppliers of the same product surprisingly tied suppliers those that choose higher levels of specific investments receive lower and more unstable orders and lower prices these results are explained by developing a simple model of flexible specialization under demand uncertainty a buyer faces multiple suppliers with heterogeneous types to supply customized parts specific investments raise surplus within the relationship but lower the seller s flexibility to cater to the outside market higher quality suppliers have a greater likelihood of selling outside and so this cost is greater for them therefore even if a buyer typically prefers high types some low type suppliers might be kept as marginal suppliers because of their greater willingness to invest more in buyer specific assets further empirical examination shows that the more tied suppliers are indeed of lower quality

price formats for branded components in industrial markets an integration of transaction cost economics and the resource based view in this paper we propose an approach to show how the capability based perspective of the resource based view of the firm can be integrated with the comparative governance approach of transaction cost economics to shed light on governance issues in interfirm relationships we argue that transacting parties create value not only through the employment of partner specific investment and coordination activities but also through the employment of heterogeneous firm specific resources that each firm brings to the relationship and that in turn governance structures reflect a discriminating alignment with these two distinct forms of value creating activities and resources our thesis is empirically tested in the context of industrial original equipment manufacturers employing branded component contracts with independent component vendors specifically we investigate the conditions under which the price terms for branded components are agreed upon more fixed ex ante versus negotiated more flexible ex post our results offer two insights first the chosen governance form reflects a trade off between safeguarding and adaptation motives even among parties engaged in cooperative relationships second valuable firm specific resources that preexist outside of the exchange relationship are at stake in these cooperative yet contractually incomplete relationships they together with relationship specific investments and activities have a significant impact on governance design

a theory of contracts with limited enforcement we present a theory of contracts under costly enforcement in the context of a dynamic relationship between an uninformed buyer and a seller who is privately informed on his persistent cost at the outset public enforcement relies on remedies for breach private enforcement comes from severing relationships we first characterize aggregate enforcement constraints ensuring that trading partners do not breach contracts unduly whether a long term contract is enforceable does not depend on the distribution of penalties for breach between the buyer and the seller while under complete information the optimal contract would remain stationary non stationarity might arise under asymmetric information enforcement constraints are time dependent and easier to satisfy as time passes indeed a high cost seller may be tempted to trade high volumes at high prices at the beginning of the relationship before breaching the contract later on yet such take the money and run strategy becomes less attractive as time passes and can be prevented with backloaded payments the optimal contract thus goes through two different phases first quantities and prices increase at the inception of the relationship later on the contract looks more stationary the public and private sides of enforcement plays different roles in determining the length of the earlier phase of contracting long run screening distortions encapsulate the quality of enforcement offering de facto a link between the quality of the legal system and contractual performances

should we be worried about the green paradox announcement effects of the acid rain program this paper presents the first empirical test of the green paradox hypothesis according to which well intended but imperfectly implemented environmental policies may lead to detrimental outcomes due to supply side responses we use the introduction of the acid rain program in the u s as a case study the theory predicts that owners of coal deposits expecting future sales to decline would supply more of their resource between the announcement of the acid rain program and its implementation moreover the incentive to increase supply would be stronger for owners of high sulfur coal this would all else equal induce an increase in sulfur dioxide emissions using data on prices heat input and sulfur content of coal delivered to u s power plants we find strong evidence of a price decrease and of an increase in the sulfur premium some indication that the amount of coal used might have increased and no evidence of fuel switching towards higher sulfur coal overall our evidence suggests that while the mechanism indicated by the theory might be at work market conditions and concurrent regulation largely prevented a green paradox from arising these results have implications for the design of climate policies

efficient adaptation in long term contracts take or pay provisions for natural gas to mitigate the inflexibility of long term contracting for natural gas parties will look for terms that minimize the need for costly adjudication while maintaining incentives for appropriate adaptation the authors examine the incident of take or pay provisions in contracts between natural gas producers and pipelines from this perspective they argue that take obligations can be viewed as a mechanism for effecting appropriate incentives for contractual performance and show that efficient breach considerations define an optimal take percentage as a function of characteristics of the transaction these incentives are distorted by regulated price ceilings which cause the adoption of take obligations in excess of optimal levels the findings refute the common perception that take or pay provisions are just an artifact of wellhead price regulation and serve no useful purpose in the absence of regulation 20 references 1 figure 1 table

corporate contracting for health care this paper examines the process used by fortune 500 companies to contract with health care carriers for complex and hard to observe services we confirm in part the conventional view that large companies partner with health care insurers however we show that the picture is more complex and that most of these companies do not engage in several aspects of partnering the complete nature of our data allows us to describe the distribution of company practices from tough bargaining without continuing relationships to partnering we also show that contract length can be a poor proxy for length of relationship

valuation of commodity based swing options in the energy markets in particular the electricity and natural gas markets many contracts incorporate flexibility of delivery options known as swing or take or pay options subject to daily as well as periodic constraints these contracts permit the option holder to repeatedly exercise the right to receive greater or smaller amounts of energy we extract market information from forward prices and volatilities and build a pricing framework for swing options based on a one factor mean reverting stochastic process for energy prices that explicitly incorporates seasonal effects we present a numerical scheme for the valuation of swing options calibrated for the case of natural gas

asset specificity and economic organization abstract this paper examines the optimization problem of firm and market organization in which both production cost and transaction cost differences are expressed as a function of asset specificity in general markets enjoy advantages by aggregating the demands of many buyers thereby realizing economies of scale or scope such production cost savings need to be assessed in relation to the transaction cost advantages that internal organization sometimes enjoys over markets in adapting to changed circumstances as it turns out both production cost economies and the transaction cost differences between firm and market organization vary systematically with the characteristics of the investments this paper employs a unified framework to assess the choice of organization form the condition of asset specificity is featured

disentangling the theories of firm boundaries a path model and empirical test theories on the motivation underlying firm boundaries have recently sparked renewed debate what best explains whether a firm relies on market control or hierarchical control to secure required resources how do the characteristics of the resources come into play in this study we consider a comprehensive path model of the governance mode decision for sourcing technological know how by integrating different perspectives on firm boundaries including transaction cost economics a resource based view and an options perspective we link characteristics of the technology i e uniqueness barriers to imitation commercial uncertainty technological dynamism to the perceived threat of opportunism the potential for sustainable advantage and the pursuit of a licensing agreement vis a vis the outright acquisition of the firm that possesses the desired know how we use structural equation modeling to analyze 127 sourcing arrangements our results show that technological dynamism and barriers to imitation indirectly influence the governance mode decision by increasing the perceived threat of opportunism commercial uncertainty directly influences the governance mode and decreases the likelihood of an acquisition vis a vis a licensing agreement although uniqueness and barriers to imitation are also positively associated with the perceived potential for sustainable advantage the potential for sustainable advantage had no direct effect on governance mode implications and suggestions for further research are offered

the effect of land tenure governance on technical efficiency evidence from three provinces in eastern china this study aims to identify the mechanisms through which land tenure governance affects the technical efficiency of grain production in an integrated framework and to examine the impacts of the public governance village self governance and relational governance of land tenure on the technical efficiency of contracted land and rented in land farm level survey data collected from liaoning jiangxi and jiangsu provinces covering the years of 2014 and 2015 is used for the empirical analysis the findings indicate that i public governance associated with land certification significantly increases the technical efficiency of grain production ii village self governance and administrative land reallocations can serve as substitutes for the land rental market in optimizing the distribution of land resources and improving technical efficiency and iii compared to multi year transfer contracts both annual and open ended transfer contracts have negative impacts on technical efficiency

non contractible investments and vertical integration in the mexican footwear industry abstract this paper examines patterns of integration among manufacturers and retailers using data from a survey of footwear manufacturers in mexico the property rights framework developed in papers by grossman and hart 1986 j polit econ 94 691 and hart and moore 1990 j polit econ 98 1119 is differentiated from the standard empirical transactions cost framework in the context of this industry the most relevant distinction between the two frameworks is that the property rights framework addresses both the benefits and costs of integration while the transactions cost framework focuses only on variation in the benefits of integration we show that the costs of integration are highest where the retailer s non contractible investment has an important effect on the overall profits from the relationship consistent with the property rights framework the data suggest that integration is less likely in these circumstances

co specific investments hold up and self enforcing contracts abstract this paper offers a general model of the hold up problem when investments are co specific agents are risk neutral and there are no information asymmetries nash bargaining with outside options determines the division of the surplus arising from exchange the model formally demonstrates that reciprocal exposure to specific assets achieved via the partial redistribution of specific investment costs to the potentially opportunistic party serves as a credible commitment to mutually advantageous exchange

vertical integration and firm boundaries the evidence since ronald h coase s 1937 seminal paper a rich set of theories has been developed that deal with firm boundaries in vertical or input output structures in the last twenty five years empirical evidence that can shed light on those theories also has been accumulating we review the findings of empirical studies that have addressed two main interrelated questions first what types of transactions are best brought within the firm and second what are the consequences of vertical integration decisions for economic outcomes such as prices quantities investment and profits throughout we highlight areas of potential cross fertilization and promising areas for future work

contract duration and relationship specific investments empirical evidence from coal markets this paper examines the importance of specific relationship investments in determining the duration of coal contracts negotiated between coal suppliers and electric utilities data for 277 coal contracts are used to perform the analysis the results provide strong support for the view that buyers and sellers make longer commitments to the terms of future trade at the contract execution stage and rely less on repeated bargaining when relationship specific investments are more important

transaction cost economics past present and future oliver williamson is the founder and chief developer of transaction cost economics tce in this brief essay on the occasion of his nobel memorial prize i offer a partial discussion of williamson s contributions by first summarizing some of the accomplishments of tce past and then sketching some of the opportunities for tce future most of the topics in both sections tce past and tce future start with a quotation from williamson s early work that i think still speaks volumes today that is while fellow travelers and successors have acted on one set of williamson s insights helping to produce the accomplishments of tce past another collection of williamson s insights has gone relatively unremarked creating some of the opportunities for tce future

supplier performance in vertical alliances the effects of self enforcing agreements and enforceable contracts the paper examines the significance of enforceability and adaptability in governing vertical alliances and their performance ramifications for suppliers literature on supplier relations suggests that suppliers are skeptical of close ties with their buyers helper 1991 helper and sako 1995 such skepticism persists in spite of the fact that buyers are writing longer enforceable contracts with fewer suppliers in this context the paper develops a transaction cost economics tce based model that distinguishes between the verifiable and nonverifiable aspects of governance attributes of safeguards incentive intensity and adaptability in explaining supplier performance variations the paper argues that the following factors prove valuable for suppliers 1 the adaptive and collaborative orientation fostered by the original equipment manufacturer s oem s credible commitment to the exchange and by information sharing on the part of the supplier 2 the presence of certain nonverifiable safeguards and 3 the incentives inherent in target pricing these assertions have been tested using data from the home appliance industry results indicate that information sharing together with 1 oem dependence and 2 target pricing does indeed enhance supplier performance also results suggest that while nonverifiable safeguards can help verifiable safeguards do not have a positive association with supplier interests under certain conditions then suppliers can venture into closer relationships with buyers and benefit

an empirical investigation of oliver williamson s organization of work oliver williamson argues that the attributes of the employment contract like intermediate transactions in general are essentially driven by the specificity of assets in the case of the organization of work it is the particular attributes of labour that determines the transaction costs of any given governance structure the paper presents a stylized account of the transaction cost model of the efficient organization of work stressing an underlying tension and ambiguity in the transaction cost framework the paper exploits a unique dataset to test for the first time with british data williamson s transaction cost predictions concerning the nature of employment contracts williamson tacitly assumes that asset specificity is exogenous in general however there is evidence in the literature that labour specificity is endogenous to employment contracts the paper endeavours to demonstrate that there is empirical evidence to suggest that specialized labour is indeed endogenous in the transaction cost mode

vertical integration and investor protection in developing countries the industrial organization of developing countries is characterized by the pervasive use of subcontracting arrangements among small financially constrained firms this paper asks whether vertical integration relaxes those financial constraints it shows that vertical integration trades off the benefits of joint liability against the costs of rendering the supply chain more opaque to external investors in contrast to the commonly held view that pervasive input and capital market imperfections are conducive to vertical integration the model predicts that the motives for vertical integration are not necessarily higher in developing countries in particular vertical integration is more likely to arise at intermediate levels of investor protection and better contract enforcement with suppliers reduces vertical integration only if financial markets are sufficiently developed evidence supporting both predictions is discussed

presidential address antitrust restrictions on single firm strategies this article offers an overview of selected developments in the law and economics of antitrust regulation of single firm strategies the strategy generating the most cases historically is resale price maintenance here the law has moved sharply in both canada and the u s towards more solid economic foundations yet a gap between the law and economics remains the economics of resale price maintenance is reviewed within a framework that is much simpler and more general than the existing literature the law on a second strategy predatory pricing represents in my view a success story for the influence of economic theory in spite of the absence of a single accepted theory of predatory pricing the remaining single firm strategies are concerned largely with the exclusion by a dominant firm of rivals from a market i review with application to cases the two most basic questions concerning exclusionary strategies are exclusionary anticompetitive contracts ever entered into voluntarily by market participants on the other hand is complete or substantial foreclosure of a market through exclusionary strategies necessarily anticompetitive cette allocution presidentielle a l association canadienne d economique presente une vue d ensemble des developpements dans le droit et l economie de la reglementation antitrust sur les strategies d une firme unique la loi sur la strategie qui genere historiquement le plus de cas le maintien du prix de revente a change dramatiquement au canada et aux etats unis et derive vers une politique qui a des assises economiques solides mais il reste un ecart entre le droit et l economie on reexamine l economie du maintien du prix de revente a l aide d un cadre d analyse qui est a la fois plus simple et plus general que ce qui existe dans la litterature specialisee la loi pour ce qui est d une seconde strategie prix d eviction est a mon avis une grande reussite pour la science economique malgre l absence d une seule theorie du prix d eviction generalement acceptee un troisieme ensemble de strategies concerne l exclusion de ses rivaux d un marche par la firme dominante l auteur reexamine avec un recours extensif aux cas les deux questions de base pour ce qui est des strategies d exclusion est ce que les participants sur un marche entrent jamais volontairement dans un arrangement contractuel qui exclut et est anticoncurrentiel d autre part est ce que la saisie complete ou substantielle d un marche par des man uvres d exclusion est necessairement anticoncurrentielle

evolution of the u s natural gas industry in response to changes in transaction costs the u s natural gas industry traditionally had producers interstate pipelines and distributors linked together via bilateral long term contracts recently the federal energy regulatory commission has encouraged buyers and sellers to deal directly with each other leading first to a spot market and marketers then to market hubs and a slight trend back to longer term contracts marketers and pipelines have consolidated to take advantage of economies of scope and systems effects which larger networks provide we use transaction cost economics to explain the evolution of exchange relationships with open access to transportation and the unbundling of transportation and storage from sales

vacancies in supply chain networks we use the supply chain matching framework to study the effects of firm exit we show that the exit of an initial supplier or end consumer has monotonic effects on the welfare of initial suppliers and end consumers but may simultaneously have positive and negative effects on intermediaries furthermore we demonstrate that there are no clear comparative statics for the effects of intermediary exit on the welfare of other firms most surprisingly intermediary exit may diminish the welfare of other firms at the same level of the supply chain

how to deliver foreign aid the case of projects governed by the spanish international agency summary international agencies use two alternative modes of governance to deliver international aid projects under bilateral agreements with recipient governments in house or through incumbent ngos through the lenses of institutional and transaction cost economics this article examines 95 international aid projects delivered in morocco and ecuador by the spanish international agency finding that those projects delivered in house present different features than those projects outsourced through incumbent ngos specifically international aid projects delivered in house involve important investments in specific assets are much more complex and can turn the public agency into a hostage of its own disbursement

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

instabilities of strategic alliances an internal tensions perspective the instabilities of strategic alliances have been examined in the literature through a number of theoretical approaches alliance instabilities refer to major changes or dissolutions of alliances that are unplanned from the perspective of one or more partners although the literature identifies certain characteristics of strategic alliances that may lead to their unplanned dissolution the extent of our understanding of this subject appears to be fragmented and incomplete in this article we propose a comprehensive framework for adequately understanding alliance instabilities based on the notion of internal tensions we suggest that strategic alliances are sites in which conflicting forces develop and which can be viewed as being constituted by three key pairs of competing forces namely cooperation versus competition rigidity versus flexibility and short term versus long term orientation this tensions framework helps us in explaining the intrinsic vulnerability of alliances in terms of a wide range of internal contradictions and enables us to examine in an integrated manner the incidence dynamics and eventual dissipation of the inherent instabilities we discuss the interrelationships among the different internal tensions and their impacts on different types of strategic alliances we also examine the termination of alliances through mergers acquisitions and dissolution finally we suggest ways to empirically test the various ideas and propositions developed here and indicate directions for further research

the british electricity experiment the privatization of the electricity supply industry esi in britain which began 1990 is in itself an unremarkable event much of the esi is privately owned in several european countries and in the united states and the u k privatization program has embraced utilities since 1984 when british telecom was privatized the thing that is remarkable about recent policy toward the industry is the radical nature of the regulatory reform accompanying privatization a vertically integrated administered generation and transmission structure was replaced overnight on march 31 1990 by one that is deintegrated and market based generation and transmission have been separated and there has been an attempt to establish competition in generation a number of countries have been moving gradually in the direction of encouraging competition but nowhere else have such dramatic changes been implemented so quickly

integration of the sales force an empirical examination this article develops and tests a model of integration of a marketing function personal selling the model derived from transaction cost analysis as developed principally by williamson is formulated as a logistic function which is estimated with data from the electronic components industry as expected integration is associated with increasing levels of asset specificity difficulty of performance evaluation and the combination of these two factors contrary to the transaction cost model neither frequency of transactions nor interaction of specificity and environmental uncertainty is significantly related to integration the transaction cost model improves significantly upon the fit of a simple model relating integration to company size alone these results suggest that for studying transactions of this kind it is fruitful to view the firm as a governance structure

the market for tradable renewable energy credits abstract as states seek to foster the development of renewable energy resources some have introduced renewable portfolio standards rpss which require retailers of electricity to derive a specified amount of their energy supply from renewable energy resources rpss in texas arizona wisconsin and nevada allow for or require the use of tradable renewable energy credits the price of such credits is expected to reflect the cost premium for generating electricity from renewable resources relative to the market price of conventionally generated electricity using the market to trade renewable energy credits exposes buyers and sellers to risks of imperfect information poor performance and opportunism these risks can be managed through contractual arrangements and regulatory requirements pertaining to property rights in credits pricing term of the contract and assurance of performance

agglomeration opportunism and the organization of production abstract recent economic analysis of outsourcing has emphasized its international dimension in contrast this paper focuses on local outsourcing the paper specifies and solves a model where the organization of production vertically integrated or not and the location of production agglomerated or not are jointly determined the paper shows that agglomeration reduces opportunism a thick market effect and so serves as a substitute for integration this force will lead firms to agglomerate the paper also shows that the normative properties of equilibrium with local outsourcing are not as clear cut as for international outsourcing since local agglomeration is achieved at the cost of congestion local markets may be too thick which would not be the case for an increase in the thickness of a world market finally the many changes in economic and social circumstance that have been labeled globalization do not impact only vertically integrated firms they also impact cities and industry clusters to the extent that agglomeration is a substitute for vertical integration

an imbalanced development of coal and electricity industries in china china s coal and electricity industries have a strong reliance on each other however because of excessive invasion of government it is difficult for these two industries to form a stable reasonable and transaction cost saving relationships but long run disputes and quarrels this paper discusses the pricing policies and transaction relationship between these two industries from the historical perspective it begins with the discussion of coal coal market has become competitive since 1980 due to the system of dual track approach but coal sold to electricity was still tightly controlled by government guided pricing then the paper examines electricity investment and tariff reform unlike coal entry to electricity generation sector was gradually relaxed but generation and retailing tariffs are still strictly regulated as energy demand and prices soared after 2002 coal and electricity enterprises are all unsatisfied with the rule of price setting of coal sold to electricity industry this paper concludes that the deliberate low coal price policy does protect electricity industry from fuel cost fluctuation but harm coal industry allocative and productive efficiency are difficult to achieve in the long run

ownership and control in mexico s community forestry sector abstract ownership and control are rarely synonymous this article examines the factors motivating mexican agrarian communities with forests to participate and invest in timber production activities an opportunity that has opened in the past 20 years due to changes in mexican forestry policy we propose that contractual difficulties with downstream production services and buyers led community members to forward integrate into the wood production industry to enjoy greater benefits from production an incomplete contracting model frames our analysis while original community level data from oaxaca mexico serves as the basis for empirical quantification using measures of specificity of investments uncertainty multiple uses of the forest and managerial and labor expertise it is found that communities with higher levels of human social and resource capital endowments are more likely to integrate forward into timber processing activities

a transaction costs analysis of innovations in the organization of pharmaceutical r d abstract this paper uses transaction costs economics to analyze the increasing importance of vertical disintegration of r d by large pharmaceutical and chemical firms first it discusses three characteristics of the research based pharmaceutical industry then it shows that market failures related to long term joint venture r d contracts between firms and university laboratories are less significant than appears at first and may account for their striking increase over the past fifteen years

mitigating contractual hazards unilateral options and contract length in this article we consider the ways in which the desire for efficient low cost adaptation to change influences the tradeoff between the design and duration of long term contractual relationships we examine the distortions in contract terms occasioned by nonprice competition for natural gas in the presence of wellhead price regulation deviations from optimal contract incentives significantly raise the cost of being bound to long term agreements and shorten the duration of contracts the approach we adopt suggests a method for empirically assessing the efficiency of alternative contracting practices and legal standards

why reputation favors joint ventures over vertical and horizontal integration a simple model abstract this paper investigates the effect of reputation in a model where two parties make noncontractable contributions to an economic undertaking it is shown that the optimal allocation of ownership between the parties is more similar in a repeated than in a one shot version of the model this implies that unified ownership and reputation are substitutes low discount rates and repeated investment decisions thus favor subcontracting and joint venture arrangements of the type commonly observed in japanese industry while full integration is more likely to be optimal when reputational forces are weak

buyer investment export variety and intrafirm trade abstract this paper studies a model of buyer investment and its effect on the variety and vertical structure of international trade a distinction is made between two types of buyer investment flexible and specific which differ in the ability of a buyer to match with a seller the interaction of buyer investment with the entry and pricing incentives of suppliers are analyzed it is shown that i there can be multiple equilibria in the variety of products traded and ii less product variety is associated with more intrafirm trade the possibility of multiple equilibria is consistent with the observation that some similar economies such as taiwan and south korea differ substantially in their export varieties to the u s a cross country empirical analysis confirms the negative correlation between export variety and intrafirm trade

intimidating competitors endogenous vertical integration and downstream investment in successive oligopoly this paper examines the interplay of endogenous vertical integration and cost reducing downstream investment in successive oligopoly analyzing a linear cournot model we establish the following key results i vertical integration increases own investment and decreases competitor investment intimidation effect ii asymmetric integration is a non degenerate equilibrium outcome iii compared to a benchmark model without investment complete vertical separation is a less likely outcome we argue that these findings generalize beyond the linear cournot model under reasonable assumptions

oligopsony power asset specificity and hold up evidence from the broiler industry in this article we look for empirical evidence of hold up in broiler industry production contracts by using the cross sectional national survey of broiler growers first we focus on the problem of under investment and hypothesize that the degree of agent s grower s under investment systematically depends on the principal s integrator s market power and the level of asset specificity second we provide an indirect test of hold up by looking at the grower contract payoffs as a function of the frequency of the housing facilities upgrade requests and the principal s market power the results show moderate empirical support for the presence of hold up

contracting between firms empirical evidence abstract we analyze contracts between a large buyer and her suppliers we find that contracts with critical product suppliers contain more clauses that address moral hazard primarily through monitoring if holdup concerns are larger there are more contractual protections against it over time contracts with the same supplier include additional provisions that address moral hazard through monitoring this dynamic effect is strongest for service contracts where observability and verifiability are initially lower our findings indicate that contracts become more complete over time and provide support to incomplete contracting models that argue that contracts become more complete as contracting costs decrease jel classification d86 k12 l24

time related characteristics of tenancy contracts and investment in soil conservation practices we present a dynamic model that shows how different types of land tenancy contracts and their time related characteristics influence farmers decisions to invest in soil improvement and productive inputs using recent household and plot level data from the brong ahafo region in ghana we analyze the impact of land tenancy arrangements contract duration as well as the number of times the contract has been renewed in the past on the intensity of investment in soil conservation measures such as ditches and farmyard manure and productive inputs like chemical fertilizer the empirical findings generally confirm the predictions of the theoretical model and reveal that the intensity of investments on different plots cultivated by a given farmer varies significantly with the type of tenancy arrangement on the plot as well as the time related characteristics of the contract

playing for keeps pay and performance in the nba i introduction a basic insight of agency theory is that properly designed incentive contracts can align the interests of agents with those of the principal and recent empirical work shows that workers do indeed respond to financial incentives 1 contractual incentives however are not the only force motivating workers workers also have incentives to vary effort at different points of their contract cycle to increase effort just before a new contract is signed to lock in a more lucrative deal and then reduce it after a multi year contract is secured these types of contract related incentives create clear moral hazard problems but have received little empirical attention the motivating hypothesis in this paper is that imperfect information and multi year contracts create an implicit incentive for workers to strategically alter effort over the contract cycle in the year prior to signing the contract their contract year workers may exert above average effort to convince employers that they are high quality and thus raise long term compensation once the contract is signed however workers may exert less effort because wages are effectively independent of contemporaneous performance an empirical difficulty is that this moral hazard may be obscured by two factors a selection effect may lead only high quality workers to receive contracts and career concerns may provide additional incentives and dampen the post contract decline 2 this paper employs a unique dataset for professional basketball players in the national basketball association nba from 1988 to 2002 to examine the contract related incentive effects the data include contract information year signed length of contract and value of contract for every active player in 2000 and performance measures points scored rebounds assists etc throughout each player s career contract related incentive effects are estimated from changes in individual performance over the contract cycle if performance systematically improves just before signing a new contract and falls afterward some of the fluctuation is likely due to contract related incentives i also examine the traditional link between pay and past performance which is necessary for these types of incentives to be relevant the critical advantage of this data is the detailed information on individual performance individual contract status and individual pay 3 in contrast previous work on individual incentives for example lazear 2000 paarsch and shearer 2000 and shearer 2004 studied changes infirmwide compensation plans while the empirical literature on executive pay and performance for example murphy 1985 1986 jensen and murphy 1990 gibbons and murphy 1992 kaplan 1994 and hall and liebman 1998 typically examined the link between individual pay and firm performance the individual level data constructed here have the critical variation across individuals which is needed to identify the impact of these contract related incentive effects the empirical work begins with a test of the link between pay and performance which is necessary for contract related incentives to be operational not surprisingly better performers in the nba are rewarded with higher salaries and longer contracts more relevant to the incentive issue players are strongly rewarded for improvements in performance in their contract year a one point increase in a player s scoring average for example is associated with an annual salary increase of over 300 000 this link provides the crucial motivation for the hypothesis that players will exert additional effort in their contract year to lock in the better contracts that they expect to follow the data then provide strong evidence of contract related incentive effects as overall performance does in fact improve relative to a player s long run average in the contract year and then declines after a long run contract is signed

communicating the value of dispatchability for non utility generation projects electric utilities seeking to purchase power from nonutility generators nugs need to provide information to nug developers on the value to the utility power system of various attributes in order that the developers can design projects that maximize net benefits dispatchability is one key attribute this paper outlines three previous approaches to communicating to developers the value of dispatchability and describes a fourth approach the fourth approach presents a table of numbers representing the value of dispatchability as a function of the energy bid price and escalation rate it has the advantage of simplicity from the perspective of the developer while still providing a meaningful signal to the developer

on the survival of contracts assessing the stability of technology licensing agreements in the brazilian seed industry abstract the present study focuses on contract duration as defined ex post meaning that the survival of contractual relationships is observed over time our empirical study employs hazard rate models with time varying covariates using data from technology licensing contracts between seed companies and a governmental rd 2 decrease as a function of past satisfactory outcomes 3 increase with the extent of disturbances affecting the technology s demand and other things being equal 4 increase rather than decrease over time

viewpoint empirical research on firms boundaries empirical research on the determinants of firms boundaries has flourished over the past 25 years this article discusses the progress that has been made to date emphasizing the intellectual advances made by researchers in this literature during this period i stress empirical researchers important role in operationalizing theoretical concepts and relate how success on this dimension brings these concepts to bear on real life make or buy decisions i also discuss shortcomings in the current literature in particular the paucity of research on how variation in firms boundaries can affect economic outcomes and point to how and where such shortcomings might be overcome la recherche empirique sur les determinants des frontieres de l entreprise a fleuri au cours des derniers 25 ans cet article discute des progres accomplis en mettant l accent sur les avancees intellectuelles faites par les chercheurs dans la litterature specialisee durant cette periode on souligne le role important des chercheurs empiriques dans l operationnalisation des concepts theoriques et on explique comment les succes dans ce registre ont contribuea faire que ces concepts ont eu un impact sur les decisions de faire ou faire faire dans la vie reelle on discute aussi des deficiences de cette litterature en particulier la pauvrete des travaux de recherche sur l impact de la variation dans les frontieres des entreprises sur les rendements economiques et on suggere comment de telles deficiences pourraient etre corrigees

downstream mergers and producer s capacity choice why bake a larger pie when getting a smaller slice in this article the effect of downstream horizontal mergers on the upstream producer s capacity choice was studied contrary to conventional wisdom i find a nonmonotonic relationship horizontal mergers induce a higher upstream capacity if the cost of capacity is low and a lower upstream capacity if this cost is high this result is explained by decomposing the total effect into two competing effects a change in holdup and a change in bargaining erosion

contracting for environmental property rights the case of vittel based on a real case of contracting for environmental property rights we explore several implications of coase s insights the case study adds empirical content to basic transaction costs concepts by analysing the design and implementation of a contractual arrangement between a pollutee a bottler of mineral water and several polluting farmers we analyse the bargaining between the two parties to determine how transaction cost issues valuation disputes bilateral monopoly conditions and third party effects were overcome and how they succeeded in contracting for environmental property rights we compare the vittel case with other similar cases to draw lessons for environmental rights negotiations

flexible strategies for load demand management using dynamic pricing the need for and potential role of flexible pricing options which offer an efficient means for achieving a utility s load demand management objectives are discussed the focus is on dynamic tariffs by incorporating real time features within one or more key parameters of the tariff such pricing options can be tailored to offer the degree of flexibility that is necessary and cost effective for achieving the given demand management objective s

the seeds of dissolution discrepancy and incoherence in buyer supplier exchange in this research we examine a novel mechanism of interorganizational relationship dissolution incoherence in a partner s behavior we propose that the discrepancy between an exchange partner s opportunistic behavior and the focal firm s expectations may create a state of incoherence and uncertainty and that this effect can be damaging to the exchange even when the partner s behavior is better than expected using nearly 500 longitudinal confidential reports of industrial buyers and sellers we find supportive evidence that 1 the net effect of the discrepancy is initially positive when behavior is better than expected but becomes rapidly negative thereafter and 2 the net effect of the discrepancy is always negative when behavior is worse than expected thus these effects will generally damage the exchange even as the partner tries to improve the relationship this gives insight into why exchange relationships that hit a downward spiral can be difficult if not impossible to salvage we also show that the dysfunctional consequences of discrepancy are mitigated through exchange structures such as the magnitude of dependence on an organizational partner the development phase of the relationship and the presence of bilateral idiosyncratic investments implications for theory and the management of interorganizational relationships are developed

regulation and contract design the impact of relationship specific investment a primary explanation for variation in contract structure is the extent to which contracting parties make investments specific to their transaction investment decisions are typically endogenous in contract choice however frustrating attempts at causal verification i analyze the impact of a major environmental regulation the clean air act amendment of 1990 on coal procurement strategies of u s utilities i exploit a key feature of the amendment s design to define a difference in difference model that is arguably less susceptible to endogeneity concerns i find wide support for the theoretical prediction reduced specificity leads to shorter length fixed price contracts

privatizing british coal an evolving policy problem abstract this paper examines how the announcement of pit closures in 1992 and subsequent developments in the coal industry have changed and narrowed the range of available privatization options the longer term economic forces shaping the industry s prospects and the effects of the 1992 announcement and subsequent events are analysed and the alternative models of privatization both before and after the 1992 announcement are evaluated continued market uncertainties associated at least in part with the development of gas generating capacity cast doubt on the attractiveness of british coal to private investors problems are likely to arise whichever structural option is chosen for the sale of british coal although the most feasible route appears to be to split the industry into two broad regions with scotland and other more isolated pits being disposed of separately

does asset ownership always motivate managers outside options and the property rights theory of the firm this paper studies the grossman hart moore ghm property rights approach to the theory of the firm under alternating offers bargaining when managers can pursue other occupations while negotiating over the division of the gains from cooperation the ghm results obtain if taking the best alternative job terminates bargaining outcomes are very different sometimes an agent with an important investment decision should not own the assets he works with sometimes independent assets should be owned together sometimes strictly complementary assets should be owned separately

contractual flexibility rent seeking and renegotiation design an empirical analysis of information technology outsourcing contracts this paper examines renegotiation design in contracts for outsourced information technology it services whereas prior literature in information systems has highlighted the likelihood of ex post rent seeking engendered by renegotiation we build upon literature on incomplete contracts to posit that renegotiation can be pareto improving by incorporating contingencies revealed ex post research on contract renegotiation has been hampered by two sets of challenges the lack of appropriate data and empirical challenges in identification we circumvent this problem both by appropriate data collection and by employing an identification strategy to address alternate causal explanations we propose a measure pareto improving amendments to assess renegotiation outcomes that enhance the value from outsourcing by hazard equilibration and by incorporating learning using a unique sample of 141 it outsourcing contracts we examine the role of decision rights delineated ex ante in enabling pareto improving amendments and in resolving the trade off between adaptation and rent seeking we find that flexibility provisions termination for convenience rights and contractual rights whereby vendors are granted rights to reuse know how are associated with pareto improving amendments the results are robust to potential endogeneity of contractual provisions when parties have feasible foresight and to the possibility of adverse selection in the sample we also examine alternate explanations from the literature on contractual breach implications for practitioners and researchers are discussed this paper was accepted by sandra slaughter information systems

the governance of transactions joskow s coal burning generating plants example revisited abstract in a classical paper joskow 1985 journal of law economics and organization 1 1 fall 33 80 discussed governance mechanisms for transactions between coal suppliers and electric power companies vertical integration long term and short term contracts according to the foundations of transaction cost economics vertical integration and long term contracts would be the most probable outcome when a coal burning generating plant requires durable transaction specific investments a mine mouth plant is an extreme situation this hypothesis is evaluated in the spanish context through a case study of 14 power plants located in coalfields and which have historically had poor transportation infrastructure the analysis shows that the role played by long term contracts in joskow s us example was taken in spain by state interventionist arrangements established to promote thermoelectric development in the coalfields such arrangements induced electric utilities to carry out specific investments whose only guarantee was a tacit commitment to recovery through regulation these plants would have become stranded in a pure competitive scenario so the government accepting the implicit contract argument recognised the value of these stranded investments within a highly controversial package of transition costs in the process of liberalising the electricity industry

corporate environmentalism and environmental statutory permitting abstract studies have shown that despite infrequent inspections and low penalties for statutory violations a large fraction of firms comply with environmental restrictions what then motivates compliance i investigate this question by focusing on the length of time it takes environmental agencies to process and issue new source construction permits pursuant to clean air act regulations and new industrial discharge permits pursuant to clean water act regulations i find that plants or firms with fewer instances of noncompliance receive permits for major projects more quickly in addition i find that permit delays are sensitive to economic conditions as well such as local area unemployment as far as voluntary pollution control behavior is concerned i find that regulators that issue permits for plant modifications focus primarily on statutory compliance but when permitting new plant construction where there is no plant compliance history to go on voluntary pollutant releases do matter

choice of contracts in the british national health service an empirical study following major reforms of the british national health service nhs in 1990 the roles of purchasing and providing health services were separated with the relationship between purchasers and providers governed by contracts using a mixed multinomial logit analysis we show how this policy shift led to a selection of contracts that is consistent with the predictions of a simple model based on contract theory in which the characteristics of the health services being purchased and of the contracting parties influence the choice of contract form the paper thus provides evidence in support of the practical relevance of theory in understanding health care market reform

natural gas contracts in an emerging competitive market natural gas is being viewed by many as the fuel of the 1990s and beyond because of its environmental qualities relatively low cost and significant domestic resource base however in the fall of 1991 a group of electric utility executives met with then deputy secretary of energy henson moore and asserted that an inability to obtain long term gas contracts meant that supplies are unreliable and construction of gas fueled generating stations is being discouraged this study was requested by the deputy secretary to address the issues surrounding long term gas contracts and supply reliability the relationship between supply reliability and contracts is explained in terms of the number of buyers and sellers in a market with the appropriate state regulatory policies utilities can contract for gas and obtain reliable supplies at competitive market prices public utility commissioners are encouraged to permit utilities a free choice in signing gas contracts but to allow only competitive market prices to be reflected in allowable fuel costs

a bid solicitation and selection method for developing a competitive spot priced electric market the electric utility industry is in the beginning throes of a transformation from a cost based regulated structure to a more market based less regulated system traditional unit commitment and economic dispatch methodologies can continue to provide reliable least cost solutions providing they are modified to accommodate a larger sphere of market participants this paper offers a method for an entity such as an independent system operator iso to solicit and evaluate bids for developing a spot priced electric market by replicating existing utility practices that are effective and efficient while creating an open and equitable competitive marketplace for electricity

cognition and incomplete contracts thinking about contingencies designing covenants and seeing through their implications is costly parties to a contract accordingly use heuristics and leave it incomplete the paper develops a model of limited cognition and examines its consequences for contractual design

complementarity and evolution of contractual provisions an empirical study of it services contracts an increasing volume of business activity appears to be occurring via alliances or other interfirm arrangements in which complex contracts are featured yet there has been relatively little study of contract design in the strategy or management literatures the economics literature on contracting has been extensive but it has been less concerned with learning and evolution phenomena in which strategy and organization scholars are deeply interested in this paper we investigate the relationship between two types of contractual provisions that are important in high technology contracts or contracts for which environmental uncertainty or technological complexity are significant namely contingency planning and task description previous research suggests that contracts can vary significantly in the degree of detail with which such key provisions are written and that they are each subject to learning in this paper we find evidence from a sample of 386 contracts that contingency planning and task description behave as complements in contractual design we argue that this complementarity reflects patterns of learning to contract we also find that repeated exchange between two firms leads to greater effort at contingency planning in subsequent contracts a finding that is also consistent with learning effects but not with frequently made claims that contracts and trust are substitutes

does relationship specific investment depend on asset ownership evidence from a natural experiment in the housing market the classic hold up model grossman and hart 1986 predicts that allocations of asset ownership which expose a party to expropriation reduce relationship specific investments by this party in the empirical context of t he housing market i show that the hold up model predicts more relationship specific investments such as bathroom renovations in owner occupied housing than in rental housing i confirm this prediction for the german housing market to ob tain an exogenous variation of asset home ownership i use the natural experiment of the german reunification under the communist regime ownership exist ed but was economically meaningless it was a quasi random by product of dwelling choice yet after reunification ownership unexpectedly reacquired legal fo rce

the boundary between planning and incremental budgeting empirical examination in a publicly owned corporation this paper is a study within the field of public budgeting it focuses on the capital budget and it attempts to model and analyze the capital budgeting process using a framework previously developed in the literature of incremental budgeting within this framework the paper seeks to determine empirically whether the movement of capital expenditure budgets can be represented as the routine application of incremental adjustments over an existing base of allocations and whether further forward looking adjustments can be found its setting is a british publicly owned corporation the paper proposes an extended model of incremental budgeting which explains absolute change in budget allocations by introducing variables expressing current expenditure outturn over or under spend of previous allocations previous budgetary cuts and wider financial pressures in the corporation s environment planning variables are then included in an attempt to uncover purposive behavior the analysis reveals different patterns of allocation for peripheral and for mainstream investments the former appear to grow in an incremental fashion with no response to leading planning variables the latter exhibit responsiveness to planning variables and allocations do not take the form of routine incremental adjustments to the existing base an interpretation of the results is undertaken the analysis points to revisions of existing theory and suggests fresh ways of looking at and systematically modeling the organizational system of resource allocation

implementing supplier codes of conduct in global supply chains process explanations from theoretic and empirical perspectives western buying companies impose supplier codes of conduct scc on their suppliers in developing countries however many suppliers cannot fully comply with scc and some of them even cheat in scc in this research we link contract characteristics price pressure production complexity contract duration to the likelihood of supplier s commitment to scc through a mediating process how the buying companies govern their suppliers our structural equation model analysis shows that the hierarchy relational norms governance is a perfect mediator of contract characteristics effects on the likelihood of supplier s commitment the market governance an insignificant one the managerial implications are provided for successfully implementing scc in global supply chains

licensing duration in foreign markets a real options perspective licensing can be considered an initial trial of a foreign market before a firm fully commits to it through other investment modes the length of trial has great importance because licensing duration represents part of the licensing agreement when it is too short the firm may not acquire the necessary experience and knowledge of the foreign market but if it is too long the firm misses optimal expansion timing arguing that licensing can be considered as a european style real option with a fixed holding period we develop and test a model of the determinants of licensing duration in foreign markets empirical results based on a sample of firms in various countries show that uncertainty and threat of competitive pre emption in the foreign market are related to shorter duration of the technology licensing agreements we also find that irreversibility of the impending investment moderates the relationships between uncertainty and duration specifically market and technology uncertainties in the foreign market induce shorter contracts under low levels of irreversibility

evaluating dispatchability features in competitive bidding in power systems competitive bidding for electric generating capacity is beginning to emphasize dispatchability the authors examine various aspects of the evaluation problem facing electric utilities recent private power contracts are used to illustrate the range and limits upon flexibility that are being offered only detailed production simulation models can capture the cost implications of the features being offered the value of the dispatchability was found to increase with the variable cost of operation the most important cost found was associated with projects offering only limited curtailment procedures for incorporating subtle dispatch effects in a broader evaluation framework are identified

do vertical mergers facilitate upstream collusion we investigate the impact of vertical mergers on upstream firms ability to collude when selling to downstream firms in a repeated game we show that vertical mergers give rise to an outlets effect the deviation profits of cheating unintegrated firms are reduced as these firms can no longer profitably sell to the downstream affiliates of their integrated rivals vertical mergers also result in an opposing punishment effect integrated firms typically make more profit in the punishment phase than unintegrated upstream firms the net result of these effects in an unintegrated industry is to facilitate upstream collusion we provide conditions under which further vertical integration also facilitates collusion

incomplete contracts and the choice between vertical integration and franchising abstract previous studies have demonstrated that geographical dispersion of outlets leads to an incentive for firms to franchise geographical dispersion alone however does not provide a full explanation of the firm s decision to franchise certain industries with highly dispersed retail outlets such as supermarkets almost never franchise this paper uses the incomplete contracting paradigm to demonstrate how the inability to contract over local outlet costs can drive the firm s decision to franchise or integrate since only owners have incentives to reduce cost ownership of the local outlet should rest with the party with the greatest ability to control cost the theory is then applied to several industries

why are different services outsourced to different countries the tradability revolution in services has led to a dramatic expansion of offshore outsourcing of services allowing firms to take advantage of lower production costs in foreign countries however production costs alone cannot explain the location determinants of offshore outsourcing of services in this paper we argue that minimizing transaction costs is also an important determinant of the location of offshore outsourcing of services we empirically analyze characteristics of services and characteristics of foreign countries that may impact on transaction costs in an outsourcing relationship and hence determine where services will be outsourced offshore we derive measures of service characteristics routineness complexity and interactiveness based on the tasks required to provide them further we posit that there are interaction effects between service and country characteristics using bureau of economic analysis data on us service outsourcing across 11 types of services to 31 countries between 1992 and 2005 we find that 1 services that are more routine less complex or less interactive are outsourced more to foreign countries 2 services are outsourced more to countries with higher institutional quality and greater cultural proximity 3 non routine complex and interactive services are outsourced relatively more to countries with a better institutional quality