Reaffirming relationship-specific investments: Comments on Miwa and Ramseyer's 'Rethinking Relationship-Specific Investments'

Michigan Law Review

Volumn 98, Issue 8, 1998, Pages 2668-2677

  Masten, Scott E ^a  

^a NONE

Author keywords

[No Author keywords available]

Indexed keywords

EID: 0346547290     PISSN: 00262234     EISSN: None     Source Type: Journal    
DOI: 10.2307/1290360     Document Type: Article

References (55)

1. Yoshiro Miwa & J. Mark Ramseyer, Rethinking Relationship-Specific Investments: Subcontracting in the Japanese Automobile Industry, 98 MICH. L. REV. 2636, 2637 (2000).
2. Id.
3. See R.H. Coase, The Acquisition of Fisher Body by General Motors, 43 J.L. & ECON. 15 (2000) [hereinafter Coase, Fisher Body] (criticizing Benjamin Klein et al., Vertical Integration, Appropriable Rents, and the Competitive Contracting Process, 21 J.L. & ECON. 297 (1978)).
4. See R.H. Coase, The Acquisition of Fisher Body by General Motors, 43 J.L. & ECON. 15 (2000) [hereinafter Coase, Fisher Body] (criticizing Benjamin Klein et al., Vertical Integration, Appropriable Rents, and the Competitive Contracting Process, 21 J.L. & ECON. 297 (1978)).
5. R.H. Coase, The Nature of the Firm: Origin, Meaning, Influence, 4 J.L. ECON. & ORG. 3, 44 (1988) [hereinafter Coase, Nature of the Firm].
6. Id. at 42.
7. Id. at 44.
8. Id. at 43.
9. Id. Coase actually goes one step further, declaring: "In any case, I am very doubtful whether there is such a systematic relationship [between specific investments and costs of contracting relative to vertical integration] as that described." Id.
10. Id. at 44. Remarkably, Coase documents that he formed his views of the importance of relationship-specific investments very early on. The following are excerpts from correspondence from Coase to Ronald Fowler in 1932: Suppose the production of a particular product requires a large capital equipment which is, however, specialized insofar that it can only be used for the particular product concerned or can only be readapted at great cost. Then the firm producing such a product for one consumer finds itself faced with one great risk - that the consumer may transfer his demand elsewhere or that he may exercise his monopoly power to force down the price . . . . Coase, Nature of the Firm, supra note 4, at 43 (letter dated March 24, 1932). My queries about the form of contracts for products requiring large capital equipment has shown me that contractual arrangements can be made to avoid this risk. Thus, the consuming firm may buy the particular equipment itself even though it is in another company's plant. There are a number of other contractual devices which tend to get over this difficulty. Id. at 45 (letter dated May 7, 1932).
11. I leave it to Klein to respond to Coase's critique, which he does in Benjamin Klein, Fisher-General Motors and the Nature of the Firm, 43 J.L. & ECON. 105 (2000).
12. Miwa & Ramseyer, supra note 1, at 2638 (emphasis added).
13. Miwa and Ramseyer subtly shift terminology from choosing among "governance arrangements," see, e.g., Miwa & Ramseyer, supra note 1, at 2637, to choosing among "extracontractual governance arrangements," see, e.g., id. at 2643, 2644. They also vacillate in qualifying the prediction with a reference to impediments to contracting.
14. Klein et al., supra note 3, at 302. Cf. Paul L. Joskow, Asset Specificity and the Structure of Vertical Relationships: Empirical Evidence, 4 J.L. ECON. & ORG. 95, 105 (1988) ("Other things equal, we expect the parties more frequently to choose vertical integration or a long-term contract as the quasi-rents associated with specific investments become more important and the associated benefits of precommitment increase." (emphasis added)).
15. See generally Klein et al., supra note 3; OLIVER E. WILLIAMSON, MARKETS AND HIERARCHIES: ANALYSIS AND ANTITRUST IMPLICATIONS (1975) [hereinafter WILLIAMSON, MARKETS AND HIERARCHIES]; Oliver E. Williamson, Transaction-Cost Economics: The Governance of Contractual Relations, 22 J.L. & ECON. 233 (1979) [hereinafter Williamson, Transaction-Cost Economics]; OLIVER E. WILLIAMSON, THE ECONOMIC INSTITUTIONS OF CAPITALISM: FIRMS, MARKETS, RELATIONAL CONTRACTING (1985) [hereinafter WILLIAMSON, ECONOMIC INSTITUTIONS].
16. See generally Klein et al., supra note 3; OLIVER E. WILLIAMSON, MARKETS AND HIERARCHIES: ANALYSIS AND ANTITRUST IMPLICATIONS (1975) [hereinafter WILLIAMSON, MARKETS AND HIERARCHIES]; Oliver E. Williamson, Transaction-Cost Economics: The Governance of Contractual Relations, 22 J.L. & ECON. 233 (1979) [hereinafter Williamson, Transaction-Cost Economics]; OLIVER E. WILLIAMSON, THE ECONOMIC INSTITUTIONS OF CAPITALISM: FIRMS, MARKETS, RELATIONAL CONTRACTING (1985) [hereinafter WILLIAMSON, ECONOMIC INSTITUTIONS].
17. See generally Klein et al., supra note 3; OLIVER E. WILLIAMSON, MARKETS AND HIERARCHIES: ANALYSIS AND ANTITRUST IMPLICATIONS (1975) [hereinafter WILLIAMSON, MARKETS AND HIERARCHIES]; Oliver E. Williamson, Transaction-Cost Economics: The Governance of Contractual Relations, 22 J.L. & ECON. 233 (1979) [hereinafter Williamson, Transaction-Cost Economics]; OLIVER E. WILLIAMSON, THE ECONOMIC INSTITUTIONS OF CAPITALISM: FIRMS, MARKETS, RELATIONAL CONTRACTING (1985) [hereinafter WILLIAMSON, ECONOMIC INSTITUTIONS].
18. See, e.g., Klein et al., supra note 3, at 304.
19. See, e.g., WILLIAMSON, MARKETS AND HIERARCHIES, supra note 14, at 21-24; WILLIAMSON, ECONOMIC INSTITUTIONS, supra note 14, at 56-60.
20. See, e.g., WILLIAMSON, MARKETS AND HIERARCHIES, supra note 14, at 21-24; WILLIAMSON, ECONOMIC INSTITUTIONS, supra note 14, at 56-60.
21. For example, Williamson's discussion of impediments to contracting posed by complexity and uncertainty take precedence over his discussion of idiosyncratic investments in MARKETS AND HIERARCHIES, supra note 14, at 8-10, 20-30. For Williamson's earlier formulation of the theory,
22. see Oliver E. Williamson, The Vertical Integration of Production: Market Failure Considerations, A.M. ECON. REV., May 1971 (Papers and Proceedings of the Eighty-Third Annual Meeting of the American Economic Association). 112, especially the subsection entitled "Contractual Incompleteness," at 115-17, in which he states that "only when the need to make unprogrammed adaptations is introduced does the market versus internal organization issue become engaging." id. at 113.
23. See Oliver E. Williamson, Comparative Economic Organization: The Analysis of Discrete Structural Alternatives, 36 ADMIN. SCI. Q. 269, 277-79 (1991).
24. Williamson, Transaction-Cost Economics, supra note 14, at 253. Much of the empirical literature also explicitly treats vertical integration as the result of a combination of specific investments and complexity/uncertainty. See, e.g., Scott E. Masten, The Organization of Production: Evidence from the Aerospace Industry, 27 J.L. & ECON. 403 (1984); Erin Anderson & David C. Schmittlein, Integration of the Sales Force: An Empirical Examination, 15 RAND J. EGON. 385 (1984): Erin Anderson, Transaction Costs as Determinants of Opportunism in Integrated and Independent Sales Forces, 9 J. ECON. BEHAV. & ORG. 247 (1988); Bruce R. Lyons, Contracts and Specific Investment: An Empirical Test of Transaction Cost Theory, 3 J. ECON. & MGMT. STRATEGY 257 (1994).
25. Williamson, Transaction-Cost Economics, supra note 14, at 253. Much of the empirical literature also explicitly treats vertical integration as the result of a combination of specific investments and complexity/uncertainty. See, e.g., Scott E. Masten, The Organization of Production: Evidence from the Aerospace Industry, 27 J.L. & ECON. 403 (1984); Erin Anderson & David C. Schmittlein, Integration of the Sales Force: An Empirical Examination, 15 RAND J. EGON. 385 (1984): Erin Anderson, Transaction Costs as Determinants of Opportunism in Integrated and Independent Sales Forces, 9 J. ECON. BEHAV. & ORG. 247 (1988); Bruce R. Lyons, Contracts and Specific Investment: An Empirical Test of Transaction Cost Theory, 3 J. ECON. & MGMT. STRATEGY 257 (1994).
26. Williamson, Transaction-Cost Economics, supra note 14, at 253. Much of the empirical literature also explicitly treats vertical integration as the result of a combination of specific investments and complexity/uncertainty. See, e.g., Scott E. Masten, The Organization of Production: Evidence from the Aerospace Industry, 27 J.L. & ECON. 403 (1984); Erin Anderson & David C. Schmittlein, Integration of the Sales Force: An Empirical Examination, 15 RAND J. EGON. 385 (1984): Erin Anderson, Transaction Costs as Determinants of Opportunism in Integrated and Independent Sales Forces, 9 J. ECON. BEHAV. & ORG. 247 (1988); Bruce R. Lyons, Contracts and Specific Investment: An Empirical Test of Transaction Cost Theory, 3 J. ECON. & MGMT. STRATEGY 257 (1994).
27. Williamson, Transaction-Cost Economics, supra note 14, at 253. Much of the empirical literature also explicitly treats vertical integration as the result of a combination of specific investments and complexity/uncertainty. See, e.g., Scott E. Masten, The Organization of Production: Evidence from the Aerospace Industry, 27 J.L. & ECON. 403 (1984); Erin Anderson & David C. Schmittlein, Integration of the Sales Force: An Empirical Examination, 15 RAND J. EGON. 385 (1984): Erin Anderson, Transaction Costs as Determinants of Opportunism in Integrated and Independent Sales Forces, 9 J. ECON. BEHAV. & ORG. 247 (1988); Bruce R. Lyons, Contracts and Specific Investment: An Empirical Test of Transaction Cost Theory, 3 J. ECON. & MGMT. STRATEGY 257 (1994).
28. Williamson, Transaction-Cost Economics, supra note 14, at 253. Much of the empirical literature also explicitly treats vertical integration as the result of a combination of specific investments and complexity/uncertainty. See, e.g., Scott E. Masten, The Organization of Production: Evidence from the Aerospace Industry, 27 J.L. & ECON. 403 (1984); Erin Anderson & David C. Schmittlein, Integration of the Sales Force: An Empirical Examination, 15 RAND J. EGON. 385 (1984): Erin Anderson, Transaction Costs as Determinants of Opportunism in Integrated and Independent Sales Forces, 9 J. ECON. BEHAV. & ORG. 247 (1988); Bruce R. Lyons, Contracts and Specific Investment: An Empirical Test of Transaction Cost Theory, 3 J. ECON. & MGMT. STRATEGY 257 (1994).
29. Klein et al., supra note 3, at 301. Later in the article, Klein et al. contrast the problems of contracting for land and employment services: "The primary reason [why landrental contracts rather than vertical integration can often be used to attenuate opportunistic behavior in agricultural contracts] is because it is rather cheap to specify and monitor the relevant contract terms (the quality of the good being purchased) and to enforce this particular rental contract." Id. at 320. They contrast this with employment contracts "where it is essentially impossible to effectively specify and enforce quality elements (for example, all working conditions and the effort expended by workers) . . . ." Id. 21. Holding complexity and uncertainty constant (at some nontrivial level), an increase in the level of asset specificity may increase the probability of integration if, for example, increased specificity motivates longer-term, and therefore more costly, contracts (relative to integration). But this effect is indirect in that it works through changes in contracting behavior.
30. See Miwa & Ramseyer, supra note 1, at 2653-54.
31. Id. at 2637.
32. Miwa and Ramseyer's distinction between model-specific and relationship-specific investments is irrelevant; all that matters is the difference between the value of the asset in its first-best use (supplier B producing model X for customer A) and its value if the transaction between A and B does not take place.
33. See Klein, supra note 10. at 127 (attributing this success to reputational considerations).
34. Miwa and Ramseyer, for example, describe Gilson and Roe as arguing that cross-shareholdings and membership in business groups help to address the problem of appropriability. See Miwa & Ramseyer, supra note 1, at 2644.
35. Id. at 2661.
36. See, e.g., Howard A. Shelanski & Peter G. Klein, Empirical Research in Transaction Cost Economics: A Review and Assessment, 11 J.L. ECON. & ORG. 335 (1995); Keith J. Crocker & Scott E. Masten, Regulation and Administered Contracts Revisited: Lessons from Transaction-Cost Economics for Public Utility Regulation, 9 J. REG. ECON. 5 (1996); Bruce R. Lyons, Empirical Relevance of Efficient Contract Theory: Inter-Firm Contracts, OXFORD REV. ECON. POL'Y, Winter 1996, at 27; Régis Coeurderoy & Bertrand Quélin, L'économie des coûts de transaction: un bilan des études empiriques sur l'intégration verticale [Transaction-Cost Theory: A Survey on Empirical Studies on Vertical Integration], 107 REV. D'ECONOMIE POLITIQUE 145 (1997); Scott E. Masten & Stéphane Saussier, Econometrics of Contracts: An Assessment of Developments in the Empirical Literature on Contracting, 92 REV. D'ECONOMIE INDUSTRIELLE 215 (2000).
37. See, e.g., Howard A. Shelanski & Peter G. Klein, Empirical Research in Transaction Cost Economics: A Review and Assessment, 11 J.L. ECON. & ORG. 335 (1995); Keith J. Crocker & Scott E. Masten, Regulation and Administered Contracts Revisited: Lessons from Transaction-Cost Economics for Public Utility Regulation, 9 J. REG. ECON. 5 (1996); Bruce R. Lyons, Empirical Relevance of Efficient Contract Theory: Inter-Firm Contracts, OXFORD REV. ECON. POL'Y, Winter 1996, at 27; Régis Coeurderoy & Bertrand Quélin, L'économie des coûts de transaction: un bilan des études empiriques sur l'intégration verticale [Transaction-Cost Theory: A Survey on Empirical Studies on Vertical Integration], 107 REV. D'ECONOMIE POLITIQUE 145 (1997); Scott E. Masten & Stéphane Saussier, Econometrics of Contracts: An Assessment of Developments in the Empirical Literature on Contracting, 92 REV. D'ECONOMIE INDUSTRIELLE 215 (2000).
38. See, e.g., Howard A. Shelanski & Peter G. Klein, Empirical Research in Transaction Cost Economics: A Review and Assessment, 11 J.L. ECON. & ORG. 335 (1995); Keith J. Crocker & Scott E. Masten, Regulation and Administered Contracts Revisited: Lessons from Transaction-Cost Economics for Public Utility Regulation, 9 J. REG. ECON. 5 (1996); Bruce R. Lyons, Empirical Relevance of Efficient Contract Theory: Inter-Firm Contracts, OXFORD REV. ECON. POL'Y, Winter 1996, at 27; Régis Coeurderoy & Bertrand Quélin, L'économie des coûts de transaction: un bilan des études empiriques sur l'intégration verticale [Transaction-Cost Theory: A Survey on Empirical Studies on Vertical Integration], 107 REV. D'ECONOMIE POLITIQUE 145 (1997); Scott E. Masten & Stéphane Saussier, Econometrics of Contracts: An Assessment of Developments in the Empirical Literature on Contracting, 92 REV. D'ECONOMIE INDUSTRIELLE 215 (2000).
39. See, e.g., Howard A. Shelanski & Peter G. Klein, Empirical Research in Transaction Cost Economics: A Review and Assessment, 11 J.L. ECON. & ORG. 335 (1995); Keith J. Crocker & Scott E. Masten, Regulation and Administered Contracts Revisited: Lessons from Transaction-Cost Economics for Public Utility Regulation, 9 J. REG. ECON. 5 (1996); Bruce R. Lyons, Empirical Relevance of Efficient Contract Theory: Inter-Firm Contracts, OXFORD REV. ECON. POL'Y, Winter 1996, at 27; Régis Coeurderoy & Bertrand Quélin, L'économie des coûts de transaction: un bilan des études empiriques sur l'intégration verticale [Transaction-Cost Theory: A Survey on Empirical Studies on Vertical Integration], 107 REV. D'ECONOMIE POLITIQUE 145 (1997); Scott E. Masten & Stéphane Saussier, Econometrics of Contracts: An Assessment of Developments in the Empirical Literature on Contracting, 92 REV. D'ECONOMIE INDUSTRIELLE 215 (2000).
40. See, e.g., Howard A. Shelanski & Peter G. Klein, Empirical Research in Transaction Cost Economics: A Review and Assessment, 11 J.L. ECON. & ORG. 335 (1995); Keith J. Crocker & Scott E. Masten, Regulation and Administered Contracts Revisited: Lessons from Transaction-Cost Economics for Public Utility Regulation, 9 J. REG. ECON. 5 (1996); Bruce R. Lyons, Empirical Relevance of Efficient Contract Theory: Inter-Firm Contracts, OXFORD REV. ECON. POL'Y, Winter 1996, at 27; Régis Coeurderoy & Bertrand Quélin, L'économie des coûts de transaction: un bilan des études empiriques sur l'intégration verticale [Transaction-Cost Theory: A Survey on Empirical Studies on Vertical Integration], 107 REV. D'ECONOMIE POLITIQUE 145 (1997); Scott E. Masten & Stéphane Saussier, Econometrics of Contracts: An Assessment of Developments in the Empirical Literature on Contracting, 92 REV. D'ECONOMIE INDUSTRIELLE 215 (2000).
41. See, e.g., Stephen Craig Pirrong, Contracting Practices in Bulk Shipping Markets: A Transactions Cost Explanation, 36 J.L. & ECON. 937 (1993).
42. See, e.g., THOMAS N. HUBBARD, HOW WIDE IS THE SCOPE OF HOLD-UP-BASED THEORIES? CONTRACTUAL FORM AND MARKET THICKNESS IN TRUCKING (Nat'l Bureau of Econ. Research, Working Paper No. 7347, 1999); JACK A. NICKERSON & BRIAN S. SILVERMAN, WHY AREN'T ALL TRUCK DRIVERS OWNER-OPERATORS? ASSET OWNERSHIP AND THE EMPLOYMENT RELATIONSHIP IN INTERSTATE FOR-HIRE TRUCKING (Harvard Business School, Working Paper No. 00-01, 1999).
43. See, e.g., THOMAS N. HUBBARD, HOW WIDE IS THE SCOPE OF HOLD-UP-BASED THEORIES? CONTRACTUAL FORM AND MARKET THICKNESS IN TRUCKING (Nat'l Bureau of Econ. Research, Working Paper No. 7347, 1999); JACK A. NICKERSON & BRIAN S. SILVERMAN, WHY AREN'T ALL TRUCK DRIVERS OWNER-OPERATORS? ASSET OWNERSHIP AND THE EMPLOYMENT RELATIONSHIP IN INTERSTATE FOR-HIRE TRUCKING (Harvard Business School, Working Paper No. 00-01, 1999).
44. See, e.g., Anderson & Schmittlein, supra note 19; Anderson, supra note 19; Erin Anderson & Anne T. Coughlan, International Market Entry and Expansion via Independent or Integrated Channels of Distribution, 51 J. MARKETING 71 (1987); George John & Barton A. Weitz, Forward Integration into Distribution: An Empirical Test of Transaction Cost Analysis, 4 J.L. ECON. & ORG. 337 (1988): Jan B. Heide & George John, The Role of Dependence Balancing in Safeguarding Transaction-Specific Assets in Conventional Channels, 52 J. MARKETING 20 (1988).
45. See, e.g., Anderson & Schmittlein, supra note 19; Anderson, supra note 19; Erin Anderson & Anne T. Coughlan, International Market Entry and Expansion via Independent or Integrated Channels of Distribution, 51 J. MARKETING 71 (1987); George John & Barton A. Weitz, Forward Integration into Distribution: An Empirical Test of Transaction Cost Analysis, 4 J.L. ECON. & ORG. 337 (1988): Jan B. Heide & George John, The Role of Dependence Balancing in Safeguarding Transaction-Specific Assets in Conventional Channels, 52 J. MARKETING 20 (1988).
46. See, e.g., Anderson & Schmittlein, supra note 19; Anderson, supra note 19; Erin Anderson & Anne T. Coughlan, International Market Entry and Expansion via Independent or Integrated Channels of Distribution, 51 J. MARKETING 71 (1987); George John & Barton A. Weitz, Forward Integration into Distribution: An Empirical Test of Transaction Cost Analysis, 4 J.L. ECON. & ORG. 337 (1988): Jan B. Heide & George John, The Role of Dependence Balancing in Safeguarding Transaction-Specific Assets in Conventional Channels, 52 J. MARKETING 20 (1988).
47. See, e.g., Bruce R. Lyons, Contract and Specific Investment: An Empirical Test of Transaction Cost Theory, 3 J. ECON. & MGMT. STRATEGY 257 (1994).
48. See, e.g., Kirk Monteverde & David J. Teece, Supplier Switching Costs and Vertical Integration in the Automobile Industry, 13 BELL J. ECON. 206 (1982); Kirk Monteverde & David J. Teece, Appropriable Rents and Quasi-Vertical Integration, 25 J.L. & ECON. 321 (1982); Scott E. Masten et al., Vertical Integration in the U.S. Auto Industry: A Note on the Influence of Transaction Specific Assets, 12 J. ECON. BEHAV. & ORG. 265 (1989).
49. See, e.g., Kirk Monteverde & David J. Teece, Supplier Switching Costs and Vertical Integration in the Automobile Industry, 13 BELL J. ECON. 206 (1982); Kirk Monteverde & David J. Teece, Appropriable Rents and Quasi-Vertical Integration, 25 J.L. & ECON. 321 (1982); Scott E. Masten et al., Vertical Integration in the U.S. Auto Industry: A Note on the Influence of Transaction Specific Assets, 12 J. ECON. BEHAV. & ORG. 265 (1989).
50. See, e.g., Kirk Monteverde & David J. Teece, Supplier Switching Costs and Vertical Integration in the Automobile Industry, 13 BELL J. ECON. 206 (1982); Kirk Monteverde & David J. Teece, Appropriable Rents and Quasi-Vertical Integration, 25 J.L. & ECON. 321 (1982); Scott E. Masten et al., Vertical Integration in the U.S. Auto Industry: A Note on the Influence of Transaction Specific Assets, 12 J. ECON. BEHAV. & ORG. 265 (1989).
51. See, e.g., Victor P. Goldberg & John R. Erickson, Quantity and Price Adjustment in Long-Term Contracts: A Case Study of Petroleum Coke, 30 J.L. & ECON. 369 (1987).
52. Lyons, supra note 32.
53. Michael D. Whinston, On the Transaction Cost Determinants of Vertical Integration, at 2 (Feb. 9, 2000) (unpublished manuscript, on file with author).
54. Econotribology, n., the study of economic frictions: transaction-cost economics, [neologism from ECONO(MICS) + TRIBOLOGY, the science of the mechanisms of friction.]
55. OLIVER E. WILLIAMSON, THE MECHANISMS OF GOVERNANCE 13 (1996).