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The Costs of Organization

The Costs of Organization. Journal of Law, Economics, & Organization, Vol. 7, No. 1. (Spring, 1991), pp. 1-25. Presented by Carla Fernández-Corrales, Fall 2013. Scott E. Masten. James W. Meehan, Jr . Edward A. Snyder. University of Michigan. Colby College.

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The Costs of Organization

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  1. The Costs of Organization Journal of Law, Economics, & Organization, Vol. 7, No. 1. (Spring, 1991), pp. 1-25. Presentedby Carla Fernández-Corrales, Fall 2013 Scott E. Masten James W. Meehan, Jr. Edward A. Snyder University of Michigan Colby College University of Michigan (currently at Yale School of Management)

  2. Overview • Problemfor empirical research : Unobservabilityof transaction costs. • Indirect tests are unable to distinguish between market and internal transaction costs. • The article focuses on the role of internal organization costs. • Econometric methods are applied to analyze a large naval construction project • The nature of data allowed them to isolate the effects of transaction on the costs of organizing and to provide dollar estimates.

  3. Hypothesis Internal organization • Criticism: • Latent costs: for example inflexibility • Unquantifiable costs: loses due to withholding of information Institution chosen Costs of each alternative Market exchange

  4. Reduced-Form Analysis X, Z: vectors of attributes , : vectors of coefficients e, u: normally distributed random variables • Probability of observing • Resulting estimates provide only ordinal measures of the costs • If X and Z have common elements, only the difference between  and  can be determined.

  5. Direct tests • Regression techniques yield dollar estimates of the costs of organization • Regression estimation can identify the magnitude of the coefficients to perform test of hypotheses.

  6. General hypotheses

  7. Empirical setting: naval shipbuilding • Final product large, discrete, and immobile during most of its fabrication • Assembly must proceed in order • Buffer inventories are impractical • High complexity • High human asset specificityy • Physical assets are less specific • Mainly involves lowtechnology, labor intensiveactivities.

  8. Specific Hypotheses

  9. Data

  10. Data

  11. Empirical results

  12. Empirical results

  13. Discussion • Temporal specificity can be a major determinant of organization. • Integration occurs for relation specific human capital and very complex components, but the incentive comes from the internal costs rather than market costs. • Relationship specific physical assets reduces the costs of governance. • The firm is more likely to integrate engineering intense activities and more likely to internalize labor intense activities.

  14. Discussion • The independent variables have their principal influence on costs of internal organization. • Effects of engineering. • Need to know the industry under study. • Implications of changes in regulations. • Idiosyncrasies of shipbuilding must be taken into consideration.

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