Explaining the Swollen Middle: Why Most Transactions Are a Mix of Market and Hierarchy

摘要: Why are firms sometimes more efficient than markets at organizing transactions? most transactions arrayed neither the pure "market" nor "hierarchy" end of continuum, but rather in "swollen middle," incorporating features both and "hierarchy"? don't make greater use price incentives? This paper addresses these three questions by developing a model choice institution. One key building block is distinction between methods hierarchy system institutions markets. Hierarchy two distinct for transactions, each with particular costs benefits. Markets which one or methods. Although predominantly prices rely principally on hierarchy, there not one-to-one correspondence firms. Indeed, argues that it generally to mix specialize either. The focuses enforcement properties hierarchy. controls individuals directly constraining their behavior imposing constraints while do indirectly measuring outputs through constraints. Under receive salary as told, self-employed governed rewarded basis output. Each has its own biases: using maximizes effort minimizes shirking incites inflate and/or reduce quality It encourages cheating. Relying results opposite bias: under paid function output, instead following directives. They have, thus, strong incentives minimize shirk unless properly supervised, but, being fixed sum follow orders, they have few cheat. Hence experiences low shirking, potentially high cheating costs, faces costs. Organizing costs. Any given transaction will be organized i.e., A within firm if reduction achieved replacing exceeds resulting increase market case. The shows proportionately concentrates either explains why exhibit The clearly tradeoff involved benefits types firms, piecework profit centers, predicts when used.