Contracts and Specific Investment: An Empirical Test of Transaction Cost Theory

Abstract

Empirical work has failed to keep pace with recent advances in transaction cost theory and the theory of contract. The first econometric analysis of its kind is reported by using a new data set of small subcuntractors making specific inputs for customers in the engineering industry. The use of formal contracts is found to be strongly associated with specific investment and other variables measuring technological complexity and vulnerability to potential opportunism by customers. Furthermore, despite typically long‐term relationships, over half of subcontractors avoid making efficient, specific investments. Overall, we find strong support for the transaction cost theory of contracts.

The Mediated Effect of Formal and Informal Control on Governance Forms

“…There is no support for a reduction in the need to protect specific investments in favor of the use of formal norms (Lyons, 1994;Subramani & Venkatraman, 2003).…”

“…Hierarchy implies authority and a reallocation of property rights (Rialp & Salas, 2002), i.e., the simultaneous presence of control over decisions and ownership (Coase, 1996;Lyons, 1994;Masten, Meehan, & Snyder, 1989;Perry, 1989); this idea is associated with formal control (Fryxell, Dooley, & Vryza, 2002;Miller, 2011). The degree of hierarchical governance decreases alongside the reduction of property rights and ownership; the intermediate points are hybrid forms, and the market is present when there is an absence of property rights and ownership.…”

“…The greater the assets' specificity, the closer the form of governance should be to integration. These more integrated structures protect the parties from transaction costs and the risks of opportunism (Lyons, 1994;Williamson, 1989Williamson, , 1991a. Thus, relation-specific investments should lead to more property rights and ownership.…”

Testing Organizational Economics Theories of Vertical Integration

“…Case studies on vertical integration, contracting, and contracting design include: Acheson (1985), Adler, Scherer, Barton, and Katerberg (1998), Lueck (1992, 1998), Alston, Datta, and Nugent (1984), Alston and Higgs (1982), Argyres (1996), Bercovitz (1999), Bowen and Jones (1986), Brickley (1999), Buttrick (1952), Chandler (1977), Cheung (1973), Masten (1988, 1991), Crocker and Reynolds (1993), Dahl and Matson (1998), Dyer (1996), Gallick (1984), Galunic and Anderson (2000), Globerman and Schwindt (1986), Goldberg and Erickson (1987), Hallagan (1978aHallagan ( , 1978b, Heide, Dutta, and Bergen (1998), Hennart (1988), Hubbard (2001), Hubbard and Weiner (1986), Jacobides (2005), Jones and Pustay (1988), Joskow (1987Joskow ( , 1990, Kaufmann and Lafontaine (1994), Klein et al (1978), Klein (1989), Lafontaine (1992), Leffler and Rucker (1991), Libecap and Smith (1999), Libecap and Wiggins (1984), Lyons (1994), Masten and Crocker (1985), Masten and Saussier (2002), …”

Poder na formação do arranjo institucional do sistema agroindustrial citrícola paulista

“…Essas são as três estruturas de governança de WILLIAMSON (1985WILLIAMSON ( , 1991a A ECT encontra suporte empírico consistente. A relação entre investimentos em ativos específicos e uso de contratos ou integração vertical encontra evidências empíricas (MONTEVERDE;TEECE, 1982;MASTEN, 1984;JOSKOW, 1985;MASTEN;MEEHAN;SNYDER, 1991;LYONS, 1994), bem como a relação entre investimentos em ativos específicos e a duração de contratos (JOSKOW, 1987;MASTEN, 1988;LAZZARINI, 2005;MASTEN, 2009 KLEIN, 1995;MASTEN;SAUSSIER, 2000).…”