hennart, jean-francois (1993). explaining the swollen middle: why most transactions are a mix of...
TRANSCRIPT
![Page 1: Hennart, Jean-Francois (1993). Explaining the swollen middle: Why most transactions are a mix of “market” and “hierarchy.” Organization Science, 4 (4):](https://reader035.vdocument.in/reader035/viewer/2022062721/56649f1b5503460f94c315ad/html5/thumbnails/1.jpg)
Hennart, Jean-Francois (1993). Explaining the swollen middle:
Why most transactions are a mix of “market” and “hierarchy.”
Organization Science, 4 (4): 529-547.
Presented by Jiyoon Chung
![Page 2: Hennart, Jean-Francois (1993). Explaining the swollen middle: Why most transactions are a mix of “market” and “hierarchy.” Organization Science, 4 (4):](https://reader035.vdocument.in/reader035/viewer/2022062721/56649f1b5503460f94c315ad/html5/thumbnails/2.jpg)
2
Overview
Research question: Why do most transactions exhibit features of both markets and hierarchy?
Methods of Organizing (the price system and hierarchy) vs. Economic Institutions (markets and firms).
A more complete theory of economic institutions should consider simultaneously the costs of organizing transactions (transaction costs) in markets and those of effecting exchange within the firm (management costs) (p. 530).
![Page 3: Hennart, Jean-Francois (1993). Explaining the swollen middle: Why most transactions are a mix of “market” and “hierarchy.” Organization Science, 4 (4):](https://reader035.vdocument.in/reader035/viewer/2022062721/56649f1b5503460f94c315ad/html5/thumbnails/3.jpg)
3
Organizing Methods vs.Economic Institutions
Methods of Organizing: the price system (price constraints) and hierarchy (behavior constraints)• The price system rewards agents on the basis of their outputs.• Hierarchy rewards on the basis of behavior (inputs).
Economic Institutions: markets and firms
There is neither a one-to-one correspondence between prices and markets nor between hierarchy and firm.
![Page 4: Hennart, Jean-Francois (1993). Explaining the swollen middle: Why most transactions are a mix of “market” and “hierarchy.” Organization Science, 4 (4):](https://reader035.vdocument.in/reader035/viewer/2022062721/56649f1b5503460f94c315ad/html5/thumbnails/4.jpg)
4
Prices and Hierarchy with Positive Organizing Costs
In a world of zero transaction costs, both the price system and hierarchy would be equally effective (Coase, 1937) (p. 531).
However, with bounded rationality, opportunism, and a divergence of goals among individuals, the price system and hierarchy will both incur costs in organizing economic activities.
• Cheating costs: the sum of the cost of measuring output plus the cost of the residual amount of cheating due to imperfect measurement
• Shirking costs: the sum of the costs of constraining behavior and of those of bearing the residual amount of shirking
![Page 5: Hennart, Jean-Francois (1993). Explaining the swollen middle: Why most transactions are a mix of “market” and “hierarchy.” Organization Science, 4 (4):](https://reader035.vdocument.in/reader035/viewer/2022062721/56649f1b5503460f94c315ad/html5/thumbnails/5.jpg)
5
Hybrid Arrangements
Determinants of the choice of institution with non-linear organizing costs• Explains the presence of transactions exhibiting features of both
markets and hierarchy.
![Page 6: Hennart, Jean-Francois (1993). Explaining the swollen middle: Why most transactions are a mix of “market” and “hierarchy.” Organization Science, 4 (4):](https://reader035.vdocument.in/reader035/viewer/2022062721/56649f1b5503460f94c315ad/html5/thumbnails/6.jpg)
6
The Use of Price Incentives in Firms
Employers will use price incentives for those activities about which they have limited knowledge and/or those which are costly to supervise (p. 541).
Examples
• Piecework
• Profit centers The mix of price and behavior constraints faced by profit center
managers should vary in direct proportion to the difficulty of pricing internal transactions (p. 544).
![Page 7: Hennart, Jean-Francois (1993). Explaining the swollen middle: Why most transactions are a mix of “market” and “hierarchy.” Organization Science, 4 (4):](https://reader035.vdocument.in/reader035/viewer/2022062721/56649f1b5503460f94c315ad/html5/thumbnails/7.jpg)
7
Conclusion
Cheating and shirking costs increase more than proportionately as one concentrates in either pure price or behavior constraints.
Hence, using a mix of both methods generally minimizes the sum of cheating and shirking costs.
![Page 8: Hennart, Jean-Francois (1993). Explaining the swollen middle: Why most transactions are a mix of “market” and “hierarchy.” Organization Science, 4 (4):](https://reader035.vdocument.in/reader035/viewer/2022062721/56649f1b5503460f94c315ad/html5/thumbnails/8.jpg)
8
Questions?