Economics Dictionary of ArgumentsHome
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| Production: Production in economics refers to the process of combining inputs like labor, capital, and raw materials to create goods or services that satisfy human needs and have economic value. It involves transforming resources into outputs through various methods, contributing to economic growth and wealth creation._____________Annotation: The above characterizations of concepts are neither definitions nor exhausting presentations of problems related to them. Instead, they are intended to give a short introduction to the contributions below. – Lexicon of Arguments. | |||
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Institutional and Organizational Economics (IOE) on Production - Dictionary of Arguments
Kiesling I 15 Production/firms/transaction costs/Institutional and Organizational Economics (IOE)/Kiesling: a cooperative production relationship generates value that the parties did not (or could not) allocate in advance in their contract and which they have to divide between them. The contractual incompleteness gives each one an opportunity to try to get a bigger share of the pie, and they exert effort to do so, so it may be that vertical integration proves to be less costly because it eliminates the incentive to behave opportunistically (Monteverde and Teece, 1982)(1). >Institutional and organizational economics (IOE)/Economic theories, >Transaction Cost Economics (TCE)/Economic theories. Kiesling I 16 Example: The most commonly cited application of this idea is the analysis of the relationship between General Motors and Fisher Body in the 1920s from Klein, Crawford, and Alchian (1978)(2). General Motors had a 60 percent ownership stake in Fisher Body, which made closed car bodies for GM and other manufacturers and had considerable autonomy in decision-making in its relationship with GM. To accommodate Fisher’s production process, GM had to make some very costly investments in production machinery and processes that would have become obsolete had GM switched to another body supplier. Klein, Crawford, and Alchian used this relationship as an example of the potential cost of the holdup problem that GM would bear. The holdup problem arises when party A depends upon party B to perform some action, but party B - knowing that party A has become dependent on B to carry through with the action - threatens not to complete the action unless party A pays more than was originally agreed to by party B. This specific case ultimately resulted in GM acquiring Fisher Body in 1926 and vertically integrating into auto body production. With the producer of automobile engines and chassis now also owning the maker of automobile bodies - that is, with both operations owned by GM - there was obviously no incentive for one “division” to try to hold up the other. However, the Klein, Crawford-Alchian interpretation of this history as resulting from a holdup problem remains controversial, with a lively debate resurfacing in 2000 that included further research from Coase. As Peter Klein notes, „Klein, Crawford, and Alchian (1978)(2) and Klein (1988)(3) cite the case as a classic example of vertical integration designed to mitigate holdup in the presence of asset specificity. Fisher refused to locate its plants near G.M. assembly plants and to change its production technology in the face of an unanticipated increase in the demand for car bodies, leading G.M. to terminate its existing ten-year supply contract with Fisher and acquire full ownership. Coase (2000)(4), revisiting the original documents, argues instead that the contract performed well, and was gradually replaced with full ownership only to get Fisher’s top managers (the Fisher brothers) more closely involved in G.M.’s other operation.… Kiesling I 17 In short, G.M. did not acquire the remaining 40 percent of Fisher’s stock in response to an inappropriate alignment between transactional attributes and an existing governance structure. Rather, the long-term contract signed in 1919 was adequate for mitigating holdup in the face of asset specificity and uncertainty, and was replaced by vertical integration for secondary reasons.“ (2005(5): 446) 1. Monteverde, Kirk, and David J. Teece (1982). Appropriable Rents and Quasivertical Integration. The Journal of Law and Economics 25, 2: 321-328. 2. Klein, Benjamin, Robert G. Crawford, and Armen A. Alchian (1978). Vertical Integration, Appropriable Rents, and the Competitive Contracting Process. The Journal of Law and Economics 21, 2: 297-326. 3. Klein, Benjamin (1988). Vertical Integration as Organizational Ownership: The Fisher Body-General Motors Relationship Revisited. Journal of Law, Economics, & Organization 4, 1 (1988): 199-213. 4. Coase, Ronald H. (2000). The Acquisition of Fisher Body by General Motors. Journal of Law and Economics 43: 15–31. 5. Klein, Peter G. (2005). The Make-or-Buy Decision: Lessons from Empirical Studies. In Claude Ménard and Mary Shirley (eds.), Handbook of New Institutional Economics. Springer: 435-464._____________Explanation of symbols: Roman numerals indicate the source, arabic numerals indicate the page number. The corresponding books are indicated on the right hand side. ((s)…): Comment by the sender of the contribution. Translations: Dictionary of Arguments The note [Concept/Author], [Author1]Vs[Author2] or [Author]Vs[term] resp. "problem:"/"solution:", "old:"/"new:" and "thesis:" is an addition from the Dictionary of Arguments. If a German edition is specified, the page numbers refer to this edition. |
Institutional and Organizational Economics (IOE) Kiesling I L. Lynne Kiesling The Essential Ronald Coase Vancouver: Fraser Institute. 2021 |
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> Counter arguments against Institutional and Organizational Economics (IOE)
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