Economics 486
The Economics of
Organization
Spring
2004
Mondays 2-4:30
Monteith 311
R. N. Langlois
322 Monteith X63472
Office
hours MW 9-12 and 1-2 or by appointment
Assignment 4
In his 1980 article
(cited on the reading list), David Teece takes issue with the neoclassical
theory of joint production (specifically, the Baumol, Panzar, Willig version)
when it asserts that economies of scope in the production function implies that
production will not take place in two legally distinct specialized firms.
"Conclusions about the appropriate boundaries of the firm," Teece
argues. "cannot be drawn simply by examining the nature of the underlying
cost function."
In the theory of economic capabilities that
emerges from the work of Edith Penrose, G. B. Richardson, David Teece, and
others, one explains the boundaries of the organization -- that is, the set of
activities undertaken within the organization -- in terms of the
"pool" of knowledge, experience, and skill the organization
possesses. Activities that require capabilities similar to those the
organization possesses are less costly to undertake, and therefore more likely
to be undertaken, internally. Put this way, however, the theory of economic
capabilities seems to fall prey to the same problem as the neoclassical theory
of economies of scope: in the absence of transaction costs, even closely
similar activities could be undertaken separately if owners can costlessly
write contracts to share out the rents. Comment on the similarities and differences
between capabilities theory and the theory of joint production, including the
extent to which capabilities theory implies indivisibilities of some sort.
Whereas transaction-cost analysis seems to see
market transactions as fraught with hazards, therefore implying the widespread
desirability of integration, capabilities theory a la Richardson sees the scope
of organizations as inherently limited by the dissimilarity of the capabilities
needed for the undertaking of multiple stages of production. But, as Williamson
points out (in chapter 6 of his 1985 book), if "selective
intervention" is possible, a firm could integrate into as many stages as
it pleased at no cost by internally emulating the market. Thus, capabilities
theory must implicitly involve transaction-cost (or governance-cost) reasoning.
What kinds of transaction costs must be involved? Are they likely to be the
same kinds of costs discussed in standard transaction-cost analyses?
Due: March 29.
