IDEAS home Printed from https://ideas.repec.org/a/wly/mgtdec/v27y2006i7p573-586.html
   My bibliography  Save this article

Revisiting agency and transaction costs theory predictions on vertical financial ownership and contracting: electronic integration as an organizational form choice

Author

Listed:
  • Kaouthar Lajili

    (School of Management, University of Ottawa, 136 Jean-Jacques Lussier, Ottawa, Ontario, Canada K1N 6N5)

  • Joseph T. Mahoney

    (Department of Business Administration, College of Business, University of Illinois at Urbana-Champaign, 339 Wohlers Hall, 1206 South Sixth Street, Champaign, IL 61820, USA)

Abstract

This paper provides an organizational economics foundation to guide managers in matching the comparatively more efficient organizational mode with transactional characteristics such as: (1) the degree of (human capital) asset specificity involved in the transaction, (2) the degree of uncertainty surrounding the transaction, and (3) the number of trading partners (suppliers and buyers) in the vertical supply chain. The key role of technology, and more specifically the e-business infrastructure and its effects on organizational mode choice, is highlighted. The main results from this 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 than would have been technologically possible when Williamson's Markets and Hierarchies (Markets and Hierarchies: Analysis and Antitrust Implications. Free Press: New York, 1975) 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. Copyright © 2006 John Wiley & Sons, Ltd.

Suggested Citation

  • Kaouthar Lajili & Joseph T. Mahoney, 2006. "Revisiting agency and transaction costs theory predictions on vertical financial ownership and contracting: electronic integration as an organizational form choice," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 27(7), pages 573-586.
  • Handle: RePEc:wly:mgtdec:v:27:y:2006:i:7:p:573-586 DOI: 10.1002/mde.1275
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1002/mde.1275
    File Function: Link to full text; subscription required
    Download Restriction: no

    References listed on IDEAS

    as
    1. Krickx, Guido A., 1995. "Vertical integration in the computer mainframe industry: A transaction cost interpretation," Journal of Economic Behavior & Organization, Elsevier, vol. 26(1), pages 75-91, January.
    2. Williamson, Oliver E, 1979. "Transaction-Cost Economics: The Governance of Contractural Relations," Journal of Law and Economics, University of Chicago Press, vol. 22(2), pages 233-261, October.
    3. Tridas Mukhopadhyay & Sunder Kekre, 2002. "Strategic and Operational Benefits of Electronic Integration in B2B Procurement Processes," Management Science, INFORMS, vol. 48(10), pages 1301-1313, October.
    4. Richard N. Langlois, 2002. "Modularity in Technology and Organization," Chapters,in: Entrepreneurship and the Firm, chapter 2 Edward Elgar Publishing.
    5. William G. Ouchi, 1979. "A Conceptual Framework for the Design of Organizational Control Mechanisms," Management Science, INFORMS, vol. 25(9), pages 833-848, September.
    6. Kathleen M. Eisenhardt, 1985. "Control: Organizational and Economic Approaches," Management Science, INFORMS, vol. 31(2), pages 134-149, February.
    7. David J. Teece, 2003. "Towards an Economic Theory of the Multiproduct Firm," World Scientific Book Chapters,in: Essays In Technology Management And Policy Selected Papers of David J Teece, chapter 15, pages 419-446 World Scientific Publishing Co. Pte. Ltd..
    8. Alchian, Armen A & Demsetz, Harold, 1972. "Production , Information Costs, and Economic Organization," American Economic Review, American Economic Association, vol. 62(5), pages 777-795, December.
    9. Barzel, Yoram, 1982. "Measurement Cost and the Organization of Markets," Journal of Law and Economics, University of Chicago Press, vol. 25(1), pages 27-48, April.
    10. Weiss, Avi, 1992. "The Role of Firm-Specific Capital in Vertical Mergers," Journal of Law and Economics, University of Chicago Press, vol. 35(1), pages 71-88, April.
    11. Grossman, Sanford J & Hart, Oliver D, 1986. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 691-719, August.
    12. Williamson, Oliver E, 1971. "The Vertical Integration of Production: Market Failure Considerations," American Economic Review, American Economic Association, vol. 61(2), pages 112-123, May.
    13. Masten, Scott E. & Meehan, James Jr. & Snyder, Edward A., 1989. "Vertical integration in the U.S. auto industry : A note on the influence of transaction specific assets," Journal of Economic Behavior & Organization, Elsevier, vol. 12(2), pages 265-273, October.
    14. Lajili, Kaouthar & Barry, Peter J. & Sonka, Steven T. & Mahoney, Joseph T., 1997. "Farmers' Preferences For Crop Contracts," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 22(02), December.
    15. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    16. J. Yannis Bakos & Erik Brynjolfsson, 1997. "From Vendors to Partners: Information Technology and Incomplete Contracts in Buyer-Supplier Relationships," Working Paper Series 154, MIT Center for Coordination Science.
    17. Klein, Benjamin & Crawford, Robert G & Alchian, Armen A, 1978. "Vertical Integration, Appropriable Rents, and the Competitive Contracting Process," Journal of Law and Economics, University of Chicago Press, vol. 21(2), pages 297-326, October.
    18. Erin Anderson & David C. Schmittlein, 1984. "Integration of the Sales Force: An Empirical Examination," RAND Journal of Economics, The RAND Corporation, vol. 15(3), pages 385-395, Autumn.
    19. Anderson, Erin, 1988. "Transaction costs as determinants of opportunism in integrated and independent sales forces," Journal of Economic Behavior & Organization, Elsevier, vol. 9(3), pages 247-264, April.
    20. W. Coles, Jerilyn & Hesterly, William S., 1998. "The impact of firm-specific assets and the interaction of uncertainty: an examination of make or buy decisions in public and private hospitals," Journal of Economic Behavior & Organization, Elsevier, vol. 36(3), pages 383-409, August.
    21. Helfat, Constance E & Teece, David J, 1987. "Vertical Integration and Risk Reduction," Journal of Law, Economics, and Organization, Oxford University Press, vol. 3(1), pages 47-67, Spring.
    22. MacDonald, James M, 1985. "Market Exchange or Vertical Integration: An Empirical Analysis," The Review of Economics and Statistics, MIT Press, vol. 67(2), pages 327-331, May.
    23. Armour, Henry Ogden & Teece, David J, 1980. "Vertical Integration and Technological Innovation," The Review of Economics and Statistics, MIT Press, vol. 62(3), pages 470-474, August.
    24. Dow, Gregory K., 1987. "The function of authority in transaction cost economics," Journal of Economic Behavior & Organization, Elsevier, vol. 8(1), pages 13-38, March.
    25. Masten, Scott E, 1984. "The Organization of Production: Evidence from the Aerospace Industry," Journal of Law and Economics, University of Chicago Press, vol. 27(2), pages 403-417, October.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Jonathan P. O'Brien & Timothy B. Folta, 2009. "A transaction cost perspective on why, how, and when cash impacts firm performance," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 30(7), pages 465-479.
    2. Hill, John W. & Zeller, Thomas L., 2008. "The new value imperative for privately held companies: The why, what, and how of value management strategy," Business Horizons, Elsevier, vol. 51(6), pages 541-553.
    3. Moeen, Mahka & Somaya, Deepak & Mahoney, Joseph T., 2011. "Supply Portfolio Concentration in Outsourced Knowledge-Based Services," Working Papers 11-0106, University of Illinois at Urbana-Champaign, College of Business.
    4. Gebauer, Judith & Mahoney, Joseph T., 2013. "Joining Supply and Demand Conditions of IT Enabled Change: Toward an Economic Theory of Inter-firm Modulation," Working Papers 13-0100, University of Illinois at Urbana-Champaign, College of Business.
    5. Constantiou, Ioanna D & Kallinikos, Jannis, 2015. "New games, new rules: big data and the changing context of strategy," LSE Research Online Documents on Economics 63017, London School of Economics and Political Science, LSE Library.
    6. Kim, Sung Min & Mahoney, Joseph T., 2008. "Resource Co-specialization, Firm Growth, and Organizational Performance: An Empirical Analysis of Organizational Restructuring and IT Implementations," Working Papers 08-0107, University of Illinois at Urbana-Champaign, College of Business.
    7. Gui, Emi Minghui & Diesendorf, Mark & MacGill, Iain, 2017. "Distributed energy infrastructure paradigm: Community microgrids in a new institutional economics context," Renewable and Sustainable Energy Reviews, Elsevier, vol. 72(C), pages 1355-1365.
    8. Chou, Yon-Chun & Huang, Hsing-Yi & Jahn, John & Kuo, Chien-Hung, 2010. "A framework of economic analysis for tapered technology-manufacturing alliances," International Journal of Production Economics, Elsevier, vol. 127(2), pages 249-261, October.
    9. Cadot, Julien, 2014. "Agency costs of vertical integration: the case of wine business in France," 2014 International Congress, August 26-29, 2014, Ljubljana, Slovenia 182671, European Association of Agricultural Economists.
    10. Doris Morales & Ahmad H. Juma´h & Antonio Llorens-Rivera & Félix Cue & Ángel Ruiz, 2012. "Tendencias del traslado de actividades en las manufactureras en Puerto Rico y el título de propiedad sobre la planta física, 2005-2011," Economic Analysis Working Papers (2002-2010). Atlantic Review of Economics (2011-2016), Colexio de Economistas de A Coruña, Spain and Fundación Una Galicia Moderna, vol. 2, pages 1-1, December.
    11. Julien Cadot, 2015. "Agency costs of vertical integration—the case of family firms, investor-owned firms and cooperatives in the French wine industry," Agricultural Economics, International Association of Agricultural Economists, vol. 46(2), pages 187-194, March.
    12. Marcelo Bucheli & Joseph T. Mahoney & Paul M. Vaaler, 2010. "Chandler's Living History: "The Visible Hand" of Vertical Integration in Nineteenth Century America Viewed Under a Twenty-First Century Transaction Costs Economics Lens," Journal of Management Studies, Wiley Blackwell, vol. 47(s1), pages 859-883, July.
    13. Bucheli, Marcelo & Mahoney, Joseph T. & Vaaler, Paul M., 2007. "Chandler's Living History: The Visible Hand of Vertical Integration in 19th Century America Viewed under a 21st Century Transaction Costs Economics Lens," Working Papers 07-0111, University of Illinois at Urbana-Champaign, College of Business.
    14. repec:kap:jmgtgv:v:21:y:2017:i:2:d:10.1007_s10997-016-9353-5 is not listed on IDEAS
    15. Kaouthar Lajili, 2015. "Embedding human capital into governance design: a conceptual framework," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 19(4), pages 741-762, November.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wly:mgtdec:v:27:y:2006:i:7:p:573-586. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Wiley-Blackwell Digital Licensing) or (Christopher F. Baum). General contact details of provider: http://www3.interscience.wiley.com/cgi-bin/jhome/7976 .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.