A tribute to Oliver Williamson: Regulation: A transaction cost perspective

California Management Review

Volumn 52, Issue 2, 2010, Pages 147-158

  Spiller, Pablo T ^a  

^a UNIVERSITY OF CALIFORNIA   (United States)

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[No Author keywords available]

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EID: 77950325087     PISSN: 00081256     EISSN: None     Source Type: Journal    
DOI: 10.1525/cmr.2010.52.2.147     Document Type: Article

References (55)

1. See "The Prize in Economic Sciences 2009," Octber 12, 2009, available at < http://nobel-prize.org/nobel-prizes/economics/laureates/2009/ press.pdf>.
2. While Wdliamson's now classic 1976 Bell Journal of Economics article has only 645 Google durions, his book Economic Institutions of Capitalism has 18, 487 citations (more than any article or book written by any other Nobel Prize Laureate in Economics). His 1979 Journal of Law and Economics article has 5, 389 citations, the 1973 American Economics Review article 5,081, the book on Mechanisms of Governance has 3,239, and many other of his articles have more than 1,000 Google citations each.
3. See Oliver E. Williamson, "Franchise Bidding for Natural Monopolles - in General and with Resped to CATV," The Bell Journal of Economics, 7/1 (Spring 1976): 73-104.
4. A parallel, although different, application of TCE to regulation can be found in Viaor P. Goldberg, "Regulation and Administered Contraas," Bell Journal of Economics, 7/2 (Autumn 1976): 426-448. For an application to comparative regulatory governance, see Pablo T. Spiller, "Institutions and Regulatory Commitment in Utilities' Privatization," Industrial and Corporate Change, 2/3 (1993): 387-450;
5. which was then more fully developed in Brian Levy and Pablo T. Spiller, "The Institutional Foundations of Regulatory Commitment: A Comparative Analysis of Telecommunications Regulation," Journal of Law, Economics, and Organization, 10/2 (October 1994): 201-246.
6. See Williamson (1976), Journal of Law, Economics, and Organization, op. cit., p. 73.
7. Williamson (1976), Journal of Law, Economics, and Organization, op. cit, p. 75.
8. Observe that I did not say "transactions" but rather interactions, as a transaction only occurs if a regulatory action actually takes place, which, TCE would naturally require to be an endogenous result of the government/investor interaction.
9. Oliver E. Williamson, "Transaction-Cost Economics: The Governance of Contractual Relations," Journal of Law and Economics, 22/2 (October 1979): 233-261.
10. For an institutional theory of public contraas, see Pablo T. Spiller, "An Institutional Theory of Public Contracts: Regulatory Implications," in Claude Menard and Michel Ghertman, eds., Regulation, Deregulation, Reregulation - Institutional Perspectives (Northampton, MA: Edward Elgar, 2009), pp. 45-66.
11. Ronald Coase, The Regulated Industries: Discussion," American Economic Review, 54 (1964): 194-197.
12. The requirement to analyze in detail the particularities of each transaction is a key feature of TCE. See, e.g., Williamson (1979), American Economic Review, op. cit.
13. See, also, Oliver E. Williamson, The Mechanisms of Governance (Oxford: Oxford University Press. 1996).
14. See Pablo T. Spiller, "A Positive Political Theory of Regulatory Instruments: Contracts, Administrative Law or Regulatory Specificity," Southern California Law Review, 69/2 (1996): 477-515.
15. See, among others, Williamson (1976), Southern California Law Review, op. cit.;
16. Goldberg (1976), Southern California Law Review, op. cit.;
17. Oliver E. Williamson, "The Logic of Economic Organization," Journal of Law, Economics and Organization, 4/1 (1988): 65-93;
18. Levy and Spiller (1994), Journal of Law, Economics and Organization, op. cit.;
19. Spiller (1993), Journal of Law, Economics and Organization, op. cit.
20. This does not imply that utility operators/investors may not behave opportunistically (such as withholding information), but such opportunism is of the "standard" nature, discussed at length by the literature.
21. See Spiller ( 1996), Journal of Law, Economics and Organization, op. cit., Levy and Spiller ( 1994), op. cit.
22. See "In the Arbitration between Compañia de Aguas del Aconquija S.A. and Vivendi Universal S.A. Claimants v. Argentine Republic, Respondent, Case No. ARB/97/3," award issued on August 20, 2007.
23. At the end, the company attempted to rescind the contract due to Governmental breach, at which point the Province terminated the concession. The service remained in the company's hand for another year, at which point it was taken over by ENHOSA, a federal water service entity. See note 17, at p. 112.
24. An alternative way of reducing the specificity of the investment is by customers undertaking the financing of the sunk assets. For example, SAGUAPAC, the water public service cooperative of Santa Cruz, Bolivia, requires a commitment of customer financing prior to undertaking an expansion plan. For a discussion of Saguapac's strategy, see B. Walton, "Bolivia - A Perspective on Water Supply and Sewerage," WEDC, Loughborough University, 2003. Similarly, Chile's Electricity Services General Law of 1982 allows the utilities to require that customers requesting service finance, via a reimbursable charge, any required expansion cost, or that they undertake the investment directly. See Arts. 75 and 76, www.sec.cl/OpenDocs/data/13/ DFL%201%20Electricidad.doc.
25. In this sense, it is not surprising that private telecommunications operators that rushed to develop the telecommunications sector in Easter European and African countries moved first and foremost into cellular rather than fixed-link networks. While cellular has a higher long-run cost than fixed link, and on some quality dimensions is also an inferior product, the magnitude of investment in spedfic assets is much smaller than in fixed-link networks. Furthermore, a large portion of the spedfic investments in cellular telephony is undertaken by the customers themselves (who purchase the handsets). See, also, Leonard Waverman, Meloria Meschi, and Melvyn Fuss, "The Impact of Telecoms on Economic Growth in Developing Countries," 2005.
26. The privatization of Argentina's telecommunications companies is particularly illuminating. Prior to the privatization, telephone prices were raised well beyond international levels. It is not surprising, that following the privatization the government reneged on aspects of the license, like its price indexation as ways to limit the quasi-rents of the investors. The initial high prices, though, allowed the companies to remain profitable, even following government's deviation from the license provisions. See Levy and Spiller (1996), op. cit.
27. While the link between aggregate institutional features of a country and general economic growth is by now a growth industry, few have taken the step of linking actual country's general and regulatory institutions and explored the impact on sector performance. For such examples of an application to investment in telecommunications, see V. Henisz and B. Zelner, "The Institutional Environment for Telecommunications Investment," Journal of Economics, Management and Strategy, 10/1 (Spring 2001): 123-147;
28. V. Henisz and B. Zelner, "Interest Groups, Political Institutions, and Electricity Investment," mimeo, 2002. For an application to railways, telecommunications, and electricity generation across 129 countries over the period 1815-1998, see V. Henisz, "The Institutional Environment for Infrastructure Investment," Industrialand Corporate Change, 11/2 (April 2002): 355-389.
29. For an analysis of the water seaor, see William D. Savedoff and Pablo T. Spiller, Spilled Water: Institutional Commitment in the Provision of Water Services (Washington, D.C., InterAmerican Development Bank, 1999). For an alternative view, see Scott E. Masten, "Public Utility Ownership in 19th-century America: The 'Aberrant' Case of Water," unpublished manuscript, 2009.
30. This discussion follows Spiller (2009), Spilled Water: Institutional Commitment in the Provision of Water Services, op. cit.
31. Purely private contracts, on the other hand, are normally protected against public scrutiny, often requiring a judicial act to make a private contract subject to public scrutiny. Some private contracts, however, are public for obvious reasons. The registration of land ownership requires the registration of real estate transactions, making some aspects of real estate transactions then potentially open to public scrutiny.
32. For example, the Defense Contract Audit Agency, formed in 1965, is in charge of performing audits to all the U.S. Defense Department contracts. The performance of the DCAA, in turn, is supervised by the OMB, while the GOA and the CBO routinely review specific programs of the Department of Defense. See, for example, CBO, "Replacing and Repairing Equipment Used in Iraq and Afghanistan: The Army's Reset Program," Pub. No.2809, September 2007. See, also, GAO, Defense Acquisitions: Department of Defense Actions on Program Manager Empowerment and Accountability. November 9, 2007.
33. In the UK, however, the regulatory process involves the use of the competition commission. See Pablo T. Spiller and Ingo Vogelsang, "The Institutional Foundations of Regulatory Commitment in the UK: The Case of Telecommunications," Journal of Institutional and Theoretical Economics, 153/4 (December 1997): 607.
34. See, Matthew McCubbins and Thomas Schwartz, "Congressional Oversight Overlooked: Police Patrols versus Fire Alarms," American Journal of Political Science, 28/1 (February 1984): 165-179;
35. Matthew McCubbins, Roger Noll, and Barry Weingast, "Administrative Procedures as Instruments of Political Control," Journal of Law, Economics and Organization, 111 (Fall 1987): 243-277;
36. Matthew McCubbins, Roger Noll, and Barry Weingast, "Structure and Process, Politics and Policy: Administrative Arrangements and the Political Control of Agencies," Virginia Law Review, 75/2 (March 1989): 431-482;
37. Rui de Figueiredo, Pablo T. Spiller, and Santiago Urbiztondo, "An Informational Perspective on Administrative Procedures," Journal of Law. Economics & Organization, 15/1 (March 1999): 283-305. These authors also show that politicians prefer not only a proliferation of interested interest groups monitoring agencies, but also prefer them to come from divergent perspectives.
38. McCubbins and Schwartz (1984), Journal of Law. Economics & Organization, op. cit., p. 171.
39. For example, the replacement of the private party may damage the political credibility of the incumbent public agent, weakening its position vis-à-vis a third party interested in its replacement.
40. Public agents would not be expected to leave their positions without a (political) fight. Multiple interest groups may be expected to contribute to the public discussion following a challenge. Some groups, aligned with the beneficiaries of the particular contract or policy, may come to the public agent defense, and help to limit the effectiveness, or credibility, of the challenge. See de Figueiredo et al. (1999), Journal of Law. Economics & Organization, op. cit.
41. This effect works also in non-democratic environments, as long as there is competition for political power.
42. Complex compensation schemes may not pass public scrutiny and be perceived as consenting to investors' demands. Similarly, high payoff volatility must imply instances where investors may receive very high transfers, which may not be easy to explain to the public and may be perceived as corrupt. In the same way, flexible procedures may be perceived as granting favors to the investor, and thus increase the public agent exposure to third-party opportunism.
43. See Oliver E. Williamson, "Public and Private Bureaucracies: A Transaction Cost Economics Perspectives," Journal of Law Economics and Organization, 15/1 (March 1999): 306-342.
44. Two interesting parallel examples are the demise of the PRI and the LDP in Mexico and Japan respectively. Both parties controlled their respective polities for more than half a century, providing internal party mechanisms for resolution of public conflicts, as well as for the rotation, displacement, and succession of public agents. The framework provided in this article predicts that public contracting in general, and regulation in particular, became much more cumbersome and rigid in Mexico and Japan since these parties lost power. This is a topic for future research.
45. Following the nomenclature introduced by D. North, J.J. Wallis, and B.R. Weingast, "A Conceptual Framework for Understanding Recorded Human History," NBER Working Paper 12795, 2006.
46. There are many instances, though, of the introduction of some type of high-power incentives in bureaucracies. For example, Mexico's higher bureaucratic echelon under the PRI has traditionally been composed of a high-paid technocracy, linked by a network of personal and political relations to the members of cabinet. As a consequence, career advancement has been based on informal norms of reciprocity and loyalty, where bad performance implies disloyal behavior, leading to discontinuation either right away or when the bureau chief moves to another position. See, Merilee S. Grindle, "Patrons and Clients in the Bureaucracy: Career Networks in Mexico," Latin American Research Review, 12/1 (1977): 37-66.
47. This does not mean, however, that if technology changes, and economies of scale drastically fall, or investments become less sunk, that lack of intervention by governments is not feasible. In fact, the development of electricity transmission over long ranges imply that electricity generation lost its "utility" characteristic, leading to major deregulation attempts throughout the world. For an early description of New Zealand's light-handed regulation experiment, see L. Evans, A. Grimes, D.J. Teece, and B. Wilkinson, "Economic Reform in New Zealand 1984-95: The Pursuit of Efficiency," Journal of Economic Literature, 34/4 (December 1996): 1856-1902.
48. I will place the light-handed regulation approaches within the "flexible regulation" framework.
49. As exemplified in the path-breaking work by Stigler, by Peltzman, and by Posner.
50. As developed following the path-breaking work of, among others, Loeb and Magat, Baron and Myerson, and Laffont and Tirole.
51. See Oliver E. Williamson, Markets and Hierarchies: Analysis and Antitrust Implications (New York, NY: Free Press, 1975), p.26.
52. Observe that in most of the incentive theory of regulation literature, the regulatory process is described by a regulator's utility function. Interesting extensions into hierarchical or more dynamic models of regulation have brought some institutional flavors to this literature. See, for example, J. Demski and D. Sappington, "Hierarchical Regulatory Control," The Rand Journal of Economics, 18/3 (Autumn 1987): 369-383;
53. D. Baron and D. Besanko, "Commitment and Fairness in a Continuing Regulatory Relationship," Review of Economic Studies, 54 (July 1987): 413-436;
54. Jean-Jacques Laffont and Jean Tirole, A Theory of Incentives in Procurement and Regulation (Cambridge, MA: MIT Press, 1993).
55. For a TCE approach to policy making, see Pablo T. Spiller and Mariano Tommasi, The Institutional Foundations of Public Policy in Argentina: A Transactions Cost Approach (Cambridge: Cambridge University Press, 2007).