Revisiting agency and transaction costs theory predictions on vertical financial ownership and contracting: electronic integration as an organizational form choice

Kaouthar Lajili and Joseph T. Mahoney
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Kaouthar Lajili: School of Management, University of Ottawa, 136 Jean-Jacques Lussier, Ottawa, Ontario, Canada K1N 6N5, Postal: School of Management, University of Ottawa, 136 Jean-Jacques Lussier, Ottawa, Ontario, Canada K1N 6N5
Joseph T. Mahoney: Department of Business Administration, College of Business, University of Illinois at Urbana-Champaign, 339 Wohlers Hall, 1206 South Sixth Street, Champaign, IL 61820, USA, Postal: Department of Business Administration, College of Business, University of Illinois at Urbana-Champaign, 339 Wohlers Hall, 1206 South Sixth Street, Champaign, IL 61820, USA

Managerial and Decision Economics, 2006, vol. 27, issue 7, pages 573-586

Abstract: This paper provides an organizational economics foundation to guide managers in matching the comparatively more efficient organizational mode with transactional characteristics such as: (1) the degree of (human capital) asset specificity involved in the transaction, (2) the degree of uncertainty surrounding the transaction, and (3) the number of trading partners (suppliers and buyers) in the vertical supply chain. The key role of technology, and more specifically the e-business infrastructure and its effects on organizational mode choice, is highlighted. The main results from this analysis suggest that changes in information technology are changing the nature of transaction costs leading to more efficient management through an electronic integration solution thus favoring contracting and outsourcing than would have been technologically possible when Williamson's Markets and Hierarchies (Markets and Hierarchies: Analysis and Antitrust Implications. Free Press: New York, 1975) was published. It is emphasized that the transaction cost economics principles are durable but that the breathless advances in information technology, especially in the past decade, have comparatively favored lower transaction costs of markets over hierarchies. Copyright © 2006 John Wiley & Sons, Ltd.

Date: 2006
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