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
    File URL: https://libkey.io/10.1002/mde.1275?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Langlois, Richard N., 2002. "Modularity in technology and organization," Journal of Economic Behavior & Organization, Elsevier, vol. 49(1), pages 19-37, September.
    2. 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.
    3. Yoram Barzel, 1997. "Measurement Cost and the Organization of Markets," Chapters, in: Svetozar Pejovich (ed.), The Economic Foundations of Property Rights, chapter 13, pages 171-192, Edward Elgar Publishing.
    4. Erik Brynjolfsson, 1994. "Information Assets, Technology and Organization," Management Science, INFORMS, vol. 40(12), pages 1645-1662, December.
    5. 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.
    6. Sayan Chatterjee & Michael Lubatkin & Timothy Schoenecker, 1992. "Vertical Strategies and Market Structure: A Systematic Risk Analysis," Organization Science, INFORMS, vol. 3(1), pages 138-156, February.
    7. 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.
    8. 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.
    9. Srinivasan Balakrishnan & Birger Wernerfelt, 1986. "Technical change, competition and vertical integration," Strategic Management Journal, Wiley Blackwell, vol. 7(4), pages 347-359, July.
    10. 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(2), pages 1-17, December.
    11. 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.
    12. 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.
    13. Lorin M. Hitt, 1999. "Information Technology and Firm Boundaries: Evidence from Panel Data," Information Systems Research, INFORMS, vol. 10(2), pages 134-149, June.
    14. 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.
    15. William G. Ouchi, 1979. "A Conceptual Framework for the Design of Organizational Control Mechanisms," Management Science, INFORMS, vol. 25(9), pages 833-848, September.
    16. Kathleen M. Eisenhardt, 1985. "Control: Organizational and Economic Approaches," Management Science, INFORMS, vol. 31(2), pages 134-149, February.
    17. 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..
    18. 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.
    19. 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.
    20. 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.
    21. 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.
    22. 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.
    23. 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.
    24. Miller,Gary J., 1992. "Managerial Dilemmas," Cambridge Books, Cambridge University Press, number 9780521372817.
    25. Helfat, Constance E & Teece, David J, 1987. "Vertical Integration and Risk Reduction," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 3(1), pages 47-67, Spring.
    26. 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.
    27. 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.
    28. 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.
    29. 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.
    30. Kathryn Rudie Harrigan, 1986. "Matching vertical integration strategies to competitive conditions," Strategic Management Journal, Wiley Blackwell, vol. 7(6), pages 535-555, November.
    31. Frédéric Dalsace & Michael J. Leiblein & Jeffrey J. Reuer, 2002. "Do make or buy decisions matter? The influence of organizational governance on technological performance," Post-Print hal-00457649, HAL.
    32. 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. 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.
    3. Ng, Desmond W. & Salin, Victoria, 2012. "An Institutional Approach to the Examination of Food Safety," International Food and Agribusiness Management Review, International Food and Agribusiness Management Association, vol. 15(2), pages 1-26, May.
    4. 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.
    5. 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.
    6. 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.
    7. Tate, Wendy L. & Ellram, Lisa M. & Bals, Lydia & Hartmann, Evi, 2009. "Offshore outsourcing of services: An evolutionary perspective," International Journal of Production Economics, Elsevier, vol. 120(2), pages 512-524, August.
    8. Mahka Moeen & Deepak Somaya & Joseph T. Mahoney, 2013. "Supply Portfolio Concentration in Outsourced Knowledge-Based Services," Organization Science, INFORMS, vol. 24(1), pages 262-279, February.
    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. 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.
    12. Markus Menz & Sven Kunisch & Julian Birkinshaw & David J. Collis & Nicolai J. Foss & Robert E. Hoskisson & John E. Prescott, 2021. "Corporate Strategy and the Theory of the Firm in the Digital Age," Journal of Management Studies, Wiley Blackwell, vol. 58(7), pages 1695-1720, November.
    13. 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.
    14. Tharun Dolla & Boeing Laishram, 2019. "Bundling in public–private partnership projects – a conceptual framework," International Journal of Productivity and Performance Management, Emerald Group Publishing Limited, vol. 69(6), pages 1177-1203, December.
    15. Mikko Ketokivi & Joseph T. Mahoney, 2020. "Transaction Cost Economics As a Theory of Supply Chain Efficiency," Production and Operations Management, Production and Operations Management Society, vol. 29(4), pages 1011-1031, April.
    16. Anne Yenching Liu & Sungmin Lin, 2023. "Service for specialized and digitalized: Consumer switching perceptions of E‐commerce in specialty retail," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 44(3), pages 1521-1533, April.
    17. 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.
    18. 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.
    19. 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.
    20. 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.
    21. Chris R. Meyer & David G. Cohen & Sudhir Nair, 2017. "Some have to, and some want to: Why firms adopt a post-industrial form," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 21(2), pages 533-559, June.
    22. 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.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Lajili, Kaouthar & Mahoney, Joseph T., 2005. "Revisiting Agency and Transaction Costs Theory Predictions on Vertical Financial Ownership and Contracting: Electronic Integration as an Organizational Form Choice," Working Papers 05-0106, University of Illinois at Urbana-Champaign, College of Business.
    2. Davide Vannoni, 1999. "Empirical Studies of Vertical Integration: the Transaction Cost Orthodoxy," CERIS Working Paper 199903, CNR-IRCrES Research Institute on Sustainable Economic Growth - Torino (TO) ITALY - former Institute for Economic Research on Firms and Growth - Moncalieri (TO) ITALY.
    3. Francine Lafontaine & Margaret Slade, 2007. "Vertical Integration and Firm Boundaries: The Evidence," Journal of Economic Literature, American Economic Association, vol. 45(3), pages 629-685, September.
    4. Manuel González & Benito Arruñada & Alberto Fernández, 1997. "La decisión de subcontratar: el caso de las empresas constructoras," Investigaciones Economicas, Fundación SEPI, vol. 21(3), pages 501-521, September.
    5. Gonzalez-Diaz, Manuel & Arrunada, Benito & Fernandez, Alberto, 2000. "Causes of subcontracting: evidence from panel data on construction firms," Journal of Economic Behavior & Organization, Elsevier, vol. 42(2), pages 167-187, June.
    6. 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.
    7. Mahoney, Joseph T. & McNally, Regina C., 2004. "Explaining and Predicting the Choice of Organizational Form: Integrating Performance Ambiguity and Asset Specificity Effects," Working Papers 04-0109, University of Illinois at Urbana-Champaign, College of Business.
    8. Jain, Amit, 2011. "Connaissance, ressources, concurrence et les frontières de l'entreprise," Economics Thesis from University Paris Dauphine, Paris Dauphine University, number 123456789/6403 edited by Thiétart, Raymond-Alain.
    9. Mikko Ketokivi & Joseph T. Mahoney, 2020. "Transaction Cost Economics As a Theory of Supply Chain Efficiency," Production and Operations Management, Production and Operations Management Society, vol. 29(4), pages 1011-1031, April.
    10. Gibbons, Robert, 2005. "Four forma(lizable) theories of the firm?," Journal of Economic Behavior & Organization, Elsevier, vol. 58(2), pages 200-245, October.
    11. Fan, Joseph P. H., 2000. "Price uncertainty and vertical integration: an examination of petrochemical firms," Journal of Corporate Finance, Elsevier, vol. 6(4), pages 345-376, December.
    12. Paul Walker, 2015. "Contracts, Entrepreneurs, Market Creation And Judgement: The Contemporary Mainstream Theory Of The Firm In Perspective," Journal of Economic Surveys, Wiley Blackwell, vol. 29(2), pages 317-338, April.
    13. Marta Fernández-Olmos & Jorge Rosell-Martínez & Manuel A. Espitia-Escuer, 2009. "Vertical integration in the wine industry: a transaction costs analysis on the Rioja DOCa," Agribusiness, John Wiley & Sons, Ltd., vol. 25(2), pages 231-250.
    14. Oliver Gürtler, 2010. "Haggling for Rents, Relational Contracts, and the Theory of the Firm," Schmalenbach Business Review (sbr), LMU Munich School of Management, vol. 62(4), pages 359-377, October.
    15. Gatignon, Aline & Gatignon, Hubert, 2010. "Erin Anderson and the Path Breaking Work of TCE in New Areas of Business Research: Transaction Costs in Action," Journal of Retailing, Elsevier, vol. 86(3), pages 232-247.
    16. Christian Balcells, 2022. "Determinants of firm boundaries and organizational performance: an empirical investigation of the Chilean truck market," Journal of Evolutionary Economics, Springer, vol. 32(2), pages 423-461, April.
    17. James Jr., Harvey S., 1998. "Are employment and managerial control equivalent? Evidence from an electronics producer," Journal of Economic Behavior & Organization, Elsevier, vol. 36(4), pages 447-471, September.
    18. Fernández Olmos, Marta, 2010. "The performance implications of "grow or buy" decisions in the wine industry," Food Policy, Elsevier, vol. 35(3), pages 256-264, June.
    19. Robert Gibbons, 2010. "Transaction‐Cost Economics: Past, Present, and Future?," Scandinavian Journal of Economics, Wiley Blackwell, vol. 112(2), pages 263-288, June.
    20. Francine Lafontaine & Margaret E. Slade, 1998. "Incentive Contracting and the Franchise Decision," NBER Working Papers 6544, National Bureau of Economic Research, Inc.

    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.

    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 bibliographic 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.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: http://www3.interscience.wiley.com/cgi-bin/jhome/7976 .

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

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.