Revisiting Agency and Transaction Costs Theory Predictions on Vertical Financial Ownership and Contracting: Electronic Integration as an Organizational Form Choice

Following an efficiency perspective and a micro-analytic approach, this paper provides an organizational economics foundation to guide managers in matching the comparatively more efficient organizational mode with firm-level transactions possessing certain transactional characteristics. In particular, this paper focuses on the following transactional characteristics: (1) the degree of specificity of the assets involved in the transactions (including human capital asset specificity), (2) the degree of uncertainty surrounding the transaction, and (3) the number of trading partners (suppliers and buyers) in the vertical supply chain. The role of technology, and more specifically the e-business infrastructure and its effects on the choice of organizational modes, is highlighted. The main results from this transaction costs analysis suggest that changes in information technology are changing the nature of transaction costs leading to more efficient management through an electronic integration solution thus favoring contracting and outsourcing as the preferred organizational form choice than would have been possible when Williamson's (1975) Markets and Hierarchies was published. It is emphasized that the transaction cost economics principles are durable but that the breathless advances in information technology, especially in the past decade, have comparatively favored lower transaction costs of markets over hierarchies.