Gregory K. Dow

The function of authority in transaction cost economics

Abstract This paper questions the transaction cost characterization of observed authority relations as efficient governance structures. Various inadequacies in the transaction cost account of work organization and the limits of firm size are traced to its neglect of the possibility that authority may be abused opportunistically. This exemplifies a more general propensity in the transaction cost literature: that of explaining economic organization in functionalist terms, with little attention to the causal mechanisms through which efficient governance structures might actually arise. Three such mechanisms are considered, but none is found to provide an adequate rationale for the imputation of efficiency to observed structures.

Why Capital Suppliers (Usually) Hire Workers: What We Know And What We Need To Know

A fundamental question for economics is why large firms in market economies usually assign control rights to capital suppliers rather than labor suppliers. A diverse collection of answers can be found in the literature. But unfortunately little theoretical consensus has emerged, and few attempts have been made to resolve this issue through systematic empirical investigation. This paper reviews a number of different hypotheses clustering around work incentives, the financing of firms, and collective choice. We identify the strengths and weaknesses of each approach, filling in theoretical gaps where necessary, and conclude with some suggestions for empirical research.

Control rights, competitive markets, and the labor management debate

Abstract Labor-managed firms are often asserted to display perverse short-run behavior and defective investment incentives. These criticisms rely upon assumed departures from the neoclassical framework of complete and competitive markets, including restricted trading in worker memberships. This paper treats management by capital and by labor as special cases within a common analytical setting, and shows that there is no basis for distinguishing between these two principles of organizational design in a competitive-market environment: capital can be collectively owned by a labor-managed firm without undermining investment incentives. Future debate should thus center on identification of pertinent market failures.

Monitoring Costs in Chinese Agricutural Teams

Large productivity gains have been observed in Chinese agriculture following the transition from collective farming to household contracting. Using a model of mutual monitoring in an egalitarian production team, we estimate that labor supervision absorbed about 10-20 percent of total labor time for a sample of Chinese agricultural teams during 1970-76. These agency costs are lower than comparable estimates derived from aggregate data.

Allocating Control over Firms: Stock Markets versus Membership Markets

The theory of the firm must explain howdecision-making powers are allocated between suppliersof capital and labor. Most large enterprises awardformal control to investors rather than workers. Isuggest here that this asymmetry can be traced in partto differences between stock markets and membershipmarkets as institutional mechanisms for allocatingcontrol over firms. The attractive theoreticalproperties of membership markets are examined, alongwith some factors that may account for their rarity inpractice. These practical difficulties help explainthe rarity of labor-managed firms themselves, alongwith various facts about their design, behavior, anddistribution across industries.

The organization as an adaptive network

Abstract Organizations can be viewed as communication networks whose information-processing units are individual human agents. The agents in such systems can be modeled either as forwardlooking optimizers who know the true structure of the social system in which they participate, or as poorly-informed learners who revise their actions in light of past payoff experiences. Accordingly, an organizational structure can be regarded either as a vector of equilibrium strategies in a non-cooperative game, or as a pattern of interaction among individual learning mechanisms. I show that a system of interacting learning mechanisms (an adaptive network) converges to a unique pseudo-stationary organizational structure.

Replicating Walrasian equilibria using markets for membership in labor-managed firms

In standard models of the labor-managed firm, labor is misallocated in the short run. This problem can be eliminated by introducing a market for membership in each firm. These markets substitute for the capitalist labor market and support equilibria isomorphic to Walrasian equilibria. Such LMFs resemble familiar Ward-Domar-Vanek LMFs by ensuring that firm sizes are optimal for ex post members, but they also have the property that firm sizes are optimal for workers endowed with ex ante membership rights.

Internal bargaining and strategic innovation in the theory of the firm

Abstract The transaction cost analysis of the firm has identified asset idiosyncrasy and the risk of ex post opportunism as key determinants of organizational form. Simultaneously, several writers have modeled the distribution of quasi-rents among input suppliers as a bargaining game. These complementary ideas are used to formalize the notion of strategic innovation, where capital and labor attempt to redistribute firm income after specialized assets are in place, through unilateral modifications in production technology. Because strategic behavior can enlarge the quasi-rent component of fifirm income, this process may persist in equilibrium. Asset idiosyncrasy therefore creates room for an autonomous theory of organizational dynamics, partially insulated from events at the market level of analysis.

The Origins of Inequality: Insiders, Outsiders, Elites, and Commoners

Hereditary economic inequality is unknown among mobile foragers, but hereditary class distinctions between elites and commoners exist in some sedentary foraging societies. With agriculture, such stratification tends to become more pronounced. We develop a model to explain the associations among productivity, population, property rights, and inequality. Using Malthusian dynamics, we show that regional productivity growth leads to enclosure of the best sites first, creating inequality between insiders and outsiders. Hereditary elite and commoner classes subsequently arise at the best sites. Food consumption becomes more unequal and commoners become poorer. These predictions are consistent with a wide range of archaeological evidence.

The Transition to Agriculture: Climate Reversals, Population Density, and Technical Change

Until about 13,000 years ago all humans obtained their food through hunting and gathering, but thereafter people in some parts of the world began a transition to agriculture. Recent data strongly implicate climate change as the driving force behind the transition in southwest Asia. We propose a model of this process in which population and technology respond endogenously to climate. After a period of favorable environmental conditions during which regional population grew, an abrupt climate reversal forced people to take refuge at a few favored sites. The resulting spike in local population density reduced the marginal product of labor in foraging and made agriculture attractive. Once agriculture was initiated, rapid technological progress through artificial selection led to domesticated plants. Farming became a permanent part of the regional economy when this productivity growth was combined with climate recovery. The available data on cases of transition and non-transition are consistent with this model but are often inconsistent with rival explanations.