Skip to main content
×
×
Home

Uncertainty, judgment, and the theory of the firm

  • NIKLAS L. HALLBERG (a1)
Abstract:

The effects of a truly uncertain future are more far-reaching than what has traditionally been assumed in transaction cost economics (TCE). Uncertain governance choices require that agents exercise judgment in the absence of other means of estimating the payoffs associated with complex combinations of transaction attributes, contractual contingencies, and governance structures. Judgments are made on an experimental basis to incrementally improve actors’ heterogeneous cognitive representations of the contractual landscape. I argue that uncertain governance choices are subject to specific decision-biases that interact with the potentially corrective function of current organization and asymmetries in actors’ access to decision-supporting systems. These asymmetries may affect the contracting parties’ preferences over differential governance structures. Specifically, by overestimating individual unbiased rationality and disregarding how access to decision-supporting systems may affect governance choice, TCE runs the risk of underestimating the degree of vertical integration in actual firms.

Copyright
Corresponding author
*Email: niklas.hallberg@fek.lu.se
References
Hide All
Anderson, E. (1985), ‘The Sales Person as Outside Agent or Employee: A Transaction Cost Analysis’, Marketing Science, 4: 234254.
Anderson, E. and Schmittlein, D. C. (1984), ‘Integration of the Sales force: An Empirical Examination’, Rand Journal of Economics, 15: 385395.
Argyres, N. S. (1996), ‘Evidence on the Role of Firm Capabilities in Vertical Integration Decisions’, Strategic Management Journal, 17: 129150.
Argyres, N. S. (2011), ‘Using Organizational Economics to Study Organizational Capability Development and Strategy’, Organization Science, 22: 11381143.
Argyres, N. S., Bercovitz, J., and Mayer, K. J. (2007), ‘Complementarity and Evolution of Contractual Provisions: An Empirical Study of IT Services Contracts’, Organization Science, 18: 319.
Argyres, N. S., Felin, T., Foss, N. J., and Zenger, T. (2012), ‘Organizational Economics of Capability and Heterogeneity’, Organization Science, 23: 12131226.
Argyres, N. and Liebeskind, J. P. (1999), ‘Contractual Commitments, Bargaining Power, and Governance Inseparability: Incorporating History into Transaction Cost Theory’, Academy of Management Review, 24: 4963.
Argyres, N. and Mayer, K. J. (2007), ‘Contract Design as a Firm Capability: An Integration of Learning and Transaction Cost Perspectives’, Academy of Management Review, 32: 10601077.
Arrow, K. J. (1974), ‘General Economic Equilibrium: Purpose, Analytic Techniques, Collective Choice’, The American Economic Review, 64: 253272.
Arrow, K. J. (1985), ‘The Economics of Agency’, in Pratt, J. W. and Zeckhauser, R. J. (eds.), Principals and Agents: The Structure of Business, Cambridge, MA: Harvard Business School Press, pp. 3751.
Arrow, K. J. and Debreu, G. (1954), ‘Existence of an Equilibrium for a Competitive Economy’, Econometrica, 22: 265290.
Barnard, C. I. (1938), The Functions of the Executive, Cambridge, MA: Harvard University Press.
Boudreaux, D. J. and Holcombe, R. G. (1989), ‘The Coasian and Knightian Theories of the Firm’, Managerial and Decision Economics, 10: 147154.
Camerer, C. F. and Loewenstein, G. (2004), ‘Behavioral Economics: Past, Present, Future’, in Camerer, C. F., Loewenstein, G., and Rabin, M. (eds.), Advances in Behavioral Economics, Princeton: Princeton University Press, pp. 351.
Capen, E. C., Clapp, R. V., and Campbell, W. M. (1971), ‘Competitive Bidding in High-Risk Situations’, Journal of Petroleum Technology, 23: 641653.
Caplan, B. (1999), ‘The Austrian Search for Realistic Foundations’, Southern Economic Journal, 65: 823838.
Caplan, B. (2001), ‘Probability Common Sense, and Realism: A Reply to Hülsman and Block’, The Quarterly Journal of Austrian Economics, 4: 6986.
Carter, R. and Hodgson, G. M. (2006), ‘The Impact of Empirical Tests of Transaction Cost Economics on the Debate on the Nature of the Firm’, Strategic Management Journal, 27: 461476.
Church, R. (1996), ‘Deconstructing Nuffield: The Evolution of Managerial Culture in the British Motor Industry’, Economic History Review, 49: 561583.
Coase, R. H. (1937), ‘The Nature of the Firm’, Economica, New Series, 4: 386405.
Coursey, D. L., Hovis, J. L., and Schulze, W. D. (1987), ‘The Disparity Between Willingness to Accept and Willingness to Pay Measures of Value’, Quarterly Journal of Economics, 102: 679690.
Cyert, R. M. and March, J. G. (1963), ‘A Behavioral Theory of the Firm’, 2nd edition, 1992, Oxford: Blackwell Publishing.
Debreu, G. (1959), ‘Theory of Value’, New York: Wiley.
Dow, G. K. (1987), ‘The Function of Authority in Transaction Cost Economics’, Journal of Economic Behavior and organization, 8: 1338.
Dunn, S. P. (2000), ‘Fundamental Uncertainty and the Firm in the Long Run’, Review of Political Economy, 12: 419433.
Dyer, D. and Kagel, J. H. (1996), ‘Bidding in Common Value Auctions: How the Commercial Construction Industry Corrects for the Winner's Curse’, Management Science, 42: 14631475.
Earl, P. (1984), The Corporate Imagination: How Big Companies Make Mistakes, Brighton, Sussex: Wheatsheaf Books Ltd.
Earl, P. E. (1996), ‘Shackle, Entrepreneurship and the Theory of the Firm’, in Pressman, S. (ed.), Interactions in Political Economy: Malvern Ten Years After, London: Routledge, pp. 4360.
Earl, P. E. and Kay, N. M. (1985), ‘How Economists can Accept Shackle's Critique of Economic Doctrines without Arguing themselves Out of their Jobs’, Journal of Economic Studies, 12: 3448.
Eisenhardt, K. M. (1989). ‘Agency Theory: An Assessment and Review’, Academy of Management Review, 14: 5774.
Foss, K. and Foss, N. J. (2000), ‘Theoretical Isolation in Contract Theory: Suppressing Margins and Entrepreneurship’, Journal of Economic Methodology, 7: 313339.
Foss, K. and Foss, N. J. (2005), ‘Resources and Transaction Costs: How Property Rights Economics Furthers the Resource-Based View’, Strategic Management Journal, 26: 541553.
Foss, K., Foss, N. J., and Klein, P. G. (2007), ‘Original and Derived Judgment: An Entrepreneurial Theory of Economic Organization’, Organization Studies, 28: 18931912.
Foss, K., Foss, N. J., Klein, P. G., and Klein, S. K. (2007), ‘The Entrepreneurial Organization of Heterogeneous Capital’, Journal of Management Studies, 44: 11661186.
Foss, N. J. (1993), ‘More on Knight and the Theory of the Firm’, Managerial and Decision Economics, 14: 269276.
Foss, N. J. (1997), ‘Incomplete Contracts and Economic Organization: Brian Loasby and the Theory of the Firm’, DRUID Working Paper No. 97–11.
Foss, N. J. (2001), ‘Bounded Rationality in the Economics of Organization: Present Use and (Some) Future Possibilities’, Journal of Management and Governance, 5: 401425.
Foss, N. J. (2003), ‘Bounded Rationality in the Economics of Organization: “Much Cited and Little Used”’, Journal of Economic Psychology, 24: 245264.
Foss, N. J. and Hallberg, N. L. (2014), ‘How Symmetrical Assumptions Advance Strategic Management Research’, Strategic Management Journal, 35: 903913.
Foss, N. J. and Klein, P. G. (2012), Organizing Entrepreneurial Judgment: A New Approach to the Firm, Cambridge: Cambridge University Press.
Furubotn, E. G. (2001), ‘The New Institutional Economics and the Theory of the Firm’, Journal of Economic Behavior and Organization, 45: 133153.
Furubotn, E. G. and Pejovich, S. (1972), ‘Property Rights and Economic Theory: A Survey of Recent Literature’, Journal of Economic Literature, 10: 11371162.
Furubotn, E. and Richter, R. (1997). Institutions and Economic Theory. Ann Arbor: Michigan University Press.
Gigerenzer, G. (1991). ‘How to Make Cognitive Illusions Disappear: Beyond “Heuristics and Biases”’, European Review of Social Psychology, 2: 83115.
Gigerenzer, G. and Hoffrage, U. (1995), ‘How to Improve Bayesian Reasoning without Instruction: Frequency Formats’, Psychological Review, 102: 684704.
Gigerenzer, G. and Selten, R. (2001), Bounded Rationality: The Adaptive Toolbox, Massachusetts, USA: The MIT Press.
Goldstein, D. G. and Gigerenzer, G. (2002), ‘Models of Ecological Rationality: The Recognition Heuristic’, Psychological Review, 109: 7590.
Grossman, S. J. and Hart, O. D. (1983), ‘An Analysis of the Principal-Agent Problem’, Econometrica, 51: 745.
Grossman, S. J. and Hart, O. D. (1986), ‘The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration’, The Journal of Political Economy, 94: 691719.
Hanson, J. D. and Kysar, D. A. (1999), ‘Taking Behaviorism Seriously: The Problem of Market Manipulation’, New York University Law Review, 74: 630749.
Hart, O. and Moore, J. (1990), ‘Property Rights and the Nature of the Firm’, The Journal of Political Economy, 98: 11191158.
Hayek, F. A. (1945), ‘The Use of Knowledge in Society’, The American Economic Review, 35: 519530.
Hayek, F. A. (1988), The Fatal Conceit: The Errors of Socialism, London: Routledge.
Hiltzik, M. (2011), ‘Kodak's Long Fade to Black’, Los Angeles Times, December 4.
Hodgson, G. M. (2004), ‘Opportunism is not the Only Reason Why Firms Exist: Why An Explanatory Emphasis on Opportunism May Mislead Management Strategy’, Industrial and Corporate Change, 13: 401418.
Hodgson, G. M. (2011), ‘The Eclipse of the Uncertainty Concept in Mainstream Economics’, Journal of Economic Issues, XLV: 159175.
Hodgson, G. M. (2013), ‘Understanding Organizational Evolution: Towards a Research Agenda Using Generalized Darwinism’, Organization Studies, 34: 973992.
Holmström, B. (1979), ‘Moral Hazard and Observability’, Bell Journal of Economics, 10: 7491.
Jensen, M. C. and Meckling, W. H. (1976), ‘Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure’, Journal of Financial Economics, 3: 305360.
Kahneman, D. (2003), ‘A Perspective on Judgment and Choice: Mapping Bounded Rationality’, American Psychologist, 58: 697720.
Kahneman, D., Knetsch, J. L., and Thaler, R. H. (1990), ‘Experimental Tests of the Endowment Effect and the Coase Theorem’, Journal of Political Economy, 98: 13251348.
Kahneman, D., Knetsch, J. L., and Thaler, R. H. (1991), ‘Anomalies: The Endowment Effect, Loss a version, and Status Quo Bias’, Journal of Economic Perspectives, 5: 193206.
Kahneman, D. and Lovallo, D. (1993), ‘Timid Choices and Bold Forecasts: A Cognitive Perspective on Risk Taking’, Management Science, 39: 1731.
Kay, N. (2000), ‘Searching the Firm: The Role of Decision in the Economics of Organizations’, Industrial and Corporate Change, 9: 683707.
Klein, B., Crawford, R. G., and Alchian, A. A. (1978), ‘Vertical Integration, Appropriable Rents, and the Competitive Contracting Process’, Journal of Law and Economics, 21: 297326.
Knetsch, J. L. and Sinden, J. A. (1984), ‘Willingness to Pay and Compensation Demanded: Experimental Evidence of an Unexpected Disparity in Measures of Value’, Quarterly Journal of Economics, 99: 507521.
Knez, P., Smith, V. L., and Williams, A. W. (1985), ‘Individual Rationality, Market Rationality, and Value Estimation’, American Economic Review, 75: 397402.
Knight, F. H. (1921), Risk, Uncertainty and Profit, Re-print, (2002). Washington, D.C.: Beard Books.
Kreps, D. M. (1996), ‘Market and Hierarchies and (Mathematical) Economic Theory’, Industrial and Corporate Change, 5: 561595.
Lachmann, L. M. (1976), ‘From Mises to Shackle: An Essay on Austrian Economics and the Kaleidic Society’, Journal of Economic Literature, 14: 5462.
Langlois, R. N. (1982), ‘Subjective Probability and Subjective Economics’, Economic Research Reports, C. V. Starr Center for Applied Economics, New York University.
Langlois, R. N. (1984), ‘Internal Organization in a Dynamic Context: Some Theoretical Considerations’, in Jussawalla, M. and Ebenfield, H. (eds.), Communication and Information Economics: New Perspectives, Amsterdam: North Holland, pp. 2349.
Langlois, R. N. (1988), ‘Economic Change and the Boundaries of the Firm’, Journal of Institutional and Theoretical Economics, 144: 635657.
Langlois, R. N. (1992), ‘Transaction-Costs Economics in Real Time’, Industrial and Corporate Change, 1: 99127.
Langlois, R. N. and Foss, N. J. (1999), ‘Capabilities and Governance: The Rebirth of Production in the Theory of the Firm’, Kyklos, 52: 201218.
Langlois, R. N. and Robertson, P. L. (1995), Firms, Markets, and Economic Change: A Dynamic Theory of Business Institutions, London: Routledge.
Levitt, B. and March, J. G. (1988), ‘Organizational Learning’, Annual Review of Sociology, 14: 319340.
Loasby, B. (1976), Choice, Complexity and Ignorance, Cambridge: Cambridge University Press.
Loasby, B. (1999), Knowledge, Institutions and Evolution in Economics, London: Routledge.
Loasby, B. J. (2007), ‘A Cognitive Perspective on Entrepreneurship and the Firm’, Journal of Management Studies, 44: 10781106.
Mäki, U. (2004), ‘Theoretical Isolation and Explanatory Progress: Transaction Cost Economics and the Dynamics of Dispute’, Cambridge Journal of Economics, 28: 319346.
Maskin, E. and Tirole, J. (1999), ‘Unforeseen Contingencies and Incomplete Contracts’, Review of Economic Studies, 66: 83114.
Mayer, K. J. and Argyres, N. S. (2004), ‘Learning to Contract: Evidence from the Personal Computer Industry’, Organization Science, 15: 394410.
Miller, G. J. (1992), Managerial Dilemmas: The Political Economy of Hierarchy, Cambridge: Cambridge University Press.
Mises, L. (1949), Human Action, Auburn, Alabama: Ludwig von Mises Institute.
Nelson, R. R. and Winter, S. G. (1982), An Evolutionary Theory of Economic Change, Cambridge, MA: Belknap Press.
O’Driscoll, G. P. Jr. and Rizzo, M. J. (1985), The Economics of Time and Ignorance, London: Routledge.
Ostrom, E. (1998), ‘A Behavioral Approach to the Rational Choice Theory of Collective Action: Presidential Address’, American Political Science Review, 92: 122.
Ross, J. and Staw, B. M. (1993), ‘Organizational Escalation and Exit: Lessons from the Shoreham Nuclear Plant’, Academy of Management Journal, 36: 701732.
Samuelson, W. and Zeckhauser, R. (1988), ‘Status Quo Bias in Decision Making’, Journal of Risk and Uncertainty, 1: 759.
Sent, E. (2004), ‘Behavioral Conomics: How Psychology Made Its (Limited) Way Back into Economics’, History of Political Economy, 36: 735760.
Shackle, G. L. S. (1961), Decision Order and Time in Human Affairs, Cambridge: Cambridge University Press.
Simon, H. A. (1945), Administrative Behavior, 4th edition, 1997, New York: The Free Press.
Smith, V. L. (1991), ‘Rational Choice: The Contrast Between Economics and Psychology’, Journal of Political Economy, 99: 877897.
Smith, V. L. (2003), ‘Constructivist and Ecological Rationality in Economics’, American Economic Review, 93: 465508.
Smith, V. L. (2008), Rationality in Economics: Constructivist and Ecological Forms, Cambridge: Cambridge University Press.
Stanovich, K. E. and West, R. F. (2000), ‘Individual Differences in Reasoning: Implications for the Rationality Debate?’, Behavioral Brain Sciences, 23: 645726.
Staw, B. M. (1981), ‘The Escalation of Commitment to a Course of Action’, Academy of Management Review, 6: 577587.
Tarko, V. (2013), ‘Can Probability Theory Deal with Entrepreneurship?’, The Review of Austrian Economics, 26: 329345.
Teece, D. J. (1986), ‘Profiting from Technological Innovation: Implications for Integration, Collaboration, Licensing and Public Policy, Research Policy, 15: 285305.
Thaler, R. H. (1988), Anomalies: ‘The Winner's Curse’, Journal of Economic Perspectives, 2: 191202.
Tirole, J. (1999), ‘Incomplete Contracts: Where do We Stand?’, Econometrica, 67: 741781.
Tversky, A. and Kahneman, D. (1974), ‘Judgment Under Uncertainty: Heuristics and Biases’, Science, 185: 11241131.
Tversky, A. and Kahneman, D. (1981), ‘The Framing of Decisions and the Psychology of Choice’, Science, 211: 453458.
Tversky, A. and Kahneman, D. (1986), ‘Rational Choice and the Framing of Decisions’, Journal of Business, 59: 251278.
Williamson, O. E. (1975), Markets and Hierarchies: Analysis and Antitrust Implications, Collage Edition, 1983. New York: The Free Press.
Williamson, O. E. (1985), The Economic Institutions of Capitalism, New York: The Free Press.
Williamson, O. E. (1996), The Mechanisms of Governance, New York: Oxford University Press.
Recommend this journal

Email your librarian or administrator to recommend adding this journal to your organisation's collection.

Journal of Institutional Economics
  • ISSN: 1744-1374
  • EISSN: 1744-1382
  • URL: /core/journals/journal-of-institutional-economics
Please enter your name
Please enter a valid email address
Who would you like to send this to? *
×

Metrics

Altmetric attention score

Full text views

Total number of HTML views: 0
Total number of PDF views: 0 *
Loading metrics...

Abstract views

Total abstract views: 0 *
Loading metrics...

* Views captured on Cambridge Core between <date>. This data will be updated every 24 hours.

Usage data cannot currently be displayed