1. Comparative Economic Organization: The Analysis of Discrete Structural Alternatives Oliver E. Williamson, Published in Administrative Science Quarterly
Hyeonsuh Lee, 2016 Fall, BADM549

2. Oliver E. Williamson American economist
Professor at the University of California, Berkeley
Nobel Memorial Prize in Economic Science (2009)
Transaction cost economics theory

3. Overview
Distinguished three generic forms of economic organization – market, hybrid, and hierarchy.
Different coordinating and control mechanisms
Different abilities to adapt to disturbances
Supported and defined by a distinct type of contract law
Parameters which cause shifts in the comparative costs of governance.
Changes in property rights, contract law, reputation effects, and uncertainty

4. Motivation To respond to criticisms for the prior work.
The institutional environment and the institutions of governance have developed in disjunct ways.
TCE is criticized since it deals with polar forms neglecting a hybrid form.
Dimensionalization of transactions and governance is necessary.
Embeddedness problem: TCE has been developed entirely with reference to Western capitalist economies.

5. Discrete Structural Analysis
Factors that support discrete structural analysis in the paper
Firms are not extension of markets but employ different means
Discrete contract law differences support and define each form of governance
Marginal analysis (e.g., in neoclassical economics) is concerned with second order effects, which neglects first-order economizing.

6. Discrete Structural Analysis – Contract law
Each generic form of governance needs to be supported by a different form of contract law.
The form of contract law that supports hierarchy is that of forbearance.
Classical contract law : supports the autonomous market
Neoclassical contract law
Neoclassical contract law is characterized by the excuse doctrine and forbearance (hierarchy)
Consequential disturbances is where neoclassical contract law applies.
Consider unanticipated disturbances where adaptation is needed.
Provides a tolerance zone within which misalignments will be absorbed.
Requires information disclosure and substantiation.
Provides for arbitration in the event voluntary agreement fails.

7. Discrete Structural Analysis
The underpinning rationale for forbearance law (hierarchy)
Parties have deep knowledge of dispute and efficient solutions (it would be costly to communicate them, and they may not be verifiable outside the organization)
Permitting internal disputes in courts would undermine the efficacy and integrity of hierarchy.
First-Order Economizing
Neoclassical economics was too preoccupied with issues of allocative efficiency, in which marginal analysis was featured to the neglect of organizational efficiency (first order economizing)  Discrete structure analysis!

8. Dimensionalizing Governance
Transactions are aligned with governance structures, which differ in their costs and competences in a discriminating way.
Contract law
Adaptability
Adaptation (A): Autonomy, neoclassical ideal, respond independently
Adaptation (C) : Cooperation, conscious, deliberate and purposeful efforts of adaptive internal coordination
Incentive/control instrument
Key differences among governance structure

9. Dimensionalizing Governance

10. Locate hybrid modes
The neoclassical contract law of hybrid governance differs from both the classical contract law of markets and the forbearance contract law of hierarchies.
 More elastic than the former, more legalistic than the latter
Hybrid mode is characterized by:
semi-strong incentives,
an intermediate degree of administrative apparatus,
displays semi-strong adaptations, and
works out of a semi-legalistic contract law regime.

11. Discriminating Alignment
Critical dimension to which transactions differ:
Frequency of transactions recur
Uncertainty to which transactions are subject
Type of degree of asset specificity
Asset specificity
The degree to which an asset can [not] be redeployed to alternative uses and by alternative users without sacrifice of productive value
Asset specificity creates bilateral dependency and poses added contracting hazards.  Increases the TC of all forms of governance.

12. Reduced-Form Analysis
Moving along a generic curve
Much control
U-form
M-form
Little control
Market
Hybrid
Hierarchy
M(0) < X(0) < H(0)
M’ > X’ > H’ > 0

13. Comparative Statistics
To consider how equilibrium distributions of transactions will change in response to disturbances in the institutional environment
Parameter changes of four are examined:
Property rights – government expropriation, leakage
Contract law
Reputation effects
Uncertainty – more disturbances occur, disturbances become more consequential(increase in the variance)

15. Conclusion
The economic problem of society is described: adaption, autonomous and coordinated kinds
Each generic form of governance is shown to rest on a distinctive form of contract law
Hybrid form of organization has own disciplined rationale
The logic of each generic form of governance: dimensionalization and explication of governance
The institutional environment and the institutions of governance: Parameter shifts