Nicholas Argyres

Learning to Contract: Evidence from the Personal Computer Industry

Organizational forms involving more detailed contracts than are found in traditional spot market exchanges appear to be increasingly prevalent. There has been relatively little analysis, however, of the extent to which firms learn how to use contracts to manage their interfirm relationships over time. In this paper, we conduct a detailed case study of a time series of 11 contracts concluded during 1989-1997 between the same two partners, both of whom participate in the personal computer industry, to explore whether and how firms learn to contract. We find many changes to the structure of the contracts that cannot be fully explained by changes in the assets at risk in the relationship, and evidence that these changes are largely the result of processes in which the firms were learning how to work together, including learning how to contract with each other. The nature of this learning appears to have been quite incremental and local, that is, not very far sighted. We suggest how and when contracts might serve as repositories for knowledge about how to govern collaborations, and suggest some boundary conditions for this phenomenon. Our findings also provide implications for the debate about whether contracts have a positive or negative effect on interorganizational trust. We conclude with suggestions for future research.

Complementarity and Evolution of Contractual Provisions: An Empirical Study of IT Services Contracts

An increasing volume of business activity appears to be occurring via alliances or other interfirm arrangements in which complex contracts are featured, yet there has been relatively little study of contract design in the strategy or management literatures. The economics literature on contracting has been extensive, but it has been less concerned with learning and evolution---phenomena in which strategy and organization scholars are deeply interested. In this paper, we investigate the relationship between two types of contractual provisions that are important in high-technology contracts, or contracts for which environmental uncertainty or technological complexity are significant, namely, contingency planning and task description. Previous research suggests that contracts can vary significantly in the degree of detail with which such key provisions are written, and that they are each subject to learning. In this paper, we find evidence from a sample of 386 contracts that contingency planning and task description behave as complements in contractual design. We argue that this complementarity reflects patterns of learning to contract. We also find that repeated exchange between two firms leads to greater effort at contingency planning in subsequent contracts, a finding that is also consistent with learning effects, but not with frequently made claims that contracts and trust are substitutes.

CAPABILITIES, TECHNOLOGICAL DIVERSIFICATION AND DIVISIONALIZATION

This paper develops and tests the hypothesis that greater R&D diversification is associated with less divisionalization in multidivisional firms. It argues, from transaction cost theory, that the extent of divisionalization of a large firm is indicative of its emphasis on interdivisional coordination, since fewer divisional boundaries reduce interdivisional bargaining costs. Also, greater interdivisional coordination is required to pursue strategies which exploit R&D undertaken in diverse but complementary fields, that is, strategies aimed at broadening technological capabilities. Conversely, less interdivisional coordination is required for more specialized R&D, that is, for strategies aimed at deepening existing capabilities. The hypothesis finds support in patent and organizational data.

Capabilities, Transaction Costs, and Firm Boundaries

Although the literature on firm boundaries has been greatly influenced by transaction cost economics, strategy scholars often emphasize the importance of capabilities considerations in these decisions. This has led to a debate that, we suggest, has generated more heat than light. We argue that the two sets of considerations are in fact so intertwined dynamically that treating them as independent, competitive explanations is fundamentally misleading. We offer a theoretical synthesis of transaction cost and capabilities approaches to firm boundaries that seeks to overcome each approachs limitations and provides a unified and logically consistent understanding of boundary decisions.

CONTEXT, TECHNOLOGY AND STRATEGY: FORGING NEW PERSPECTIVES ON THE INDUSTRY LIFE CYCLE

The central organizing principle for this volume – the industry life cycle model – is so widely accepted and its basic premises so taken for granted that it has become conventional wisdom in business. Executives in a range of industries use the model to guide their thinking about when and how to invest in various industries. Diversification decisions, for example, are often made on the basis of life cycle logic, especially as large, established companies seek high-growth opportunities for investment.

Organizational Economics of Capability and Heterogeneity

For decades, the literatures on firm capabilities and organizational economics have been at odds with each other, specifically relative to explaining organizational boundaries and heterogeneity. We briefly trace the history of the relationship between the capabilities literature and organizational economics, and we point to the dominance of a “capabilities first” logic in this relationship. We argue that capabilities considerations are inherently intertwined with questions about organizational boundaries and internal organization, and we use this point to respond to the prevalent capabilities first logic. We offer an integrative research agenda that focuses first on the governance of capabilities and then on the capability of governance.

Franchisee Associations as Sources of Bargaining Power? Some Evidence

The empirical literature in economics and strategy on contract structure, including on franchise contract structure, has been largely based on agency and transaction cost theories. The effects of bargaining power have been much less studied. This paper considers the role of independent franchisee associations in franchising relationships as a means to test for the presence of bargaining power effects. We find that the presence or absence of a franchisee association is significantly related to each of three key contractual and relationship characteristics: contract duration, noncompete stringency, and terminations/nonrenewals. This suggests that bargaining power should be accounted for in studies of contract structure and relationship outcomes.

The Organizational Economics of Organizational Capability and Heterogeneity: A Research Agenda

For decades, the literatures on firm capabilities and organizational economics have been at odds with each other, specifically relative to explaining organizational boundaries and heterogeneity. We briefly trace the history of the relationship between the capabilities literature and organizational economics and point to the dominance of a “capabilities first” logic in this relationship. We argue that capabilities considerations are inherently intertwined with questions about organizational boundaries and internal organization, and use this point to respond to the prevalent “capabilities first” logic. We offer an integrative research agenda that focuses, first, on the governance of capabilities and, second, on the capability of governance.

Internal organization from a transaction cost perspective

According to TCE, different forms of economic organization – markets, hierarchies, hybrid forms of various kinds, etc. – are characterized by different “syndromes of attributes,” or coherent sets of features (Williamson, 1991). Because each form of organization implements a distinctive set of governance features, each is efficient for a different type of transaction, implying trade-offs among the forms. The two key categories of features are the allocation of decision-making authority among and within firms and the intensity of the incentives facing firms and members of them. By concentrating decision-making authority, hierarchies have the benefit of facilitating “cooperative adaptation”; that is, coordinated change among two or more parties. Adaptation to new economic circumstances is, after all, the main function of an economic system (Hayek, 1945). Hierarchies are said to facilitate cooperative adaptation better than markets because unlike for markets, courts will not intervene in internal disputes and fiat is available as a last resort. This leaves more scope for the management hierarchy to use its authority to promote cooperative adaptation to unanticipated circumstances (Williamson, 1975, 1991). On the other hand, hierarchies feature weaker incentive intensity, that is, weaker links between individual or unit performance and individual or unit reward. This is because market-like levels of incentive intensity would inhibit cooperative adaptation by stimulating “autonomous adaptation” instead. Autonomous adaptation refers to adaptation by individual firms or organizational members that occurs without regard to its effects on other parties. Williamson (1985) also argues that market-like incentives lack credibility within hierarchies due to the ultimate availability of fiat. Thus, for TCE, the most fundamental trade-off between various forms of internal organization is between cooperative adaptation and incentive intensity.

The Role of Relational Contracts in Inter-Firm Relationships: Theory and Evidence on Multiunit Franchising

This paper develops a model of relational contracting to help explain the prevalence of multiunit franchising; a phenomenon not fully understood in the literature. The model is used to derive a key prediction, which is that franchise systems with a greater propensity to engage in multiunit franchising will feature greater mutual cooperation between franchisor and franchisees. Evidence for this prediction is found in data on franchisee-franchisor litigation outcomes from a sample of franchise disclosures.