The selective intervention is a theoretical debate and cost-effective response to the problem: "Is that a vertical integration a firm is always a solution as good or greater than a vertical disintegration of a firm? . This debate, still current, is built around two propositions: that of Williamson and that of Grossman and Hart. The concept was proposed by Williamson and aims to compare a large firm and what it might be and whether it was divided into smaller entities for each activity.
In this first part we discuss Williamson's suggestions. The non-intuitive idea of the work, since cons-factual, is to suggest that a firm would have for example interest entities to be managed separately from the already vertically integrated. The distinction with the approach of Williamson and that of Grossman and Hart based on principal-agent relationship. The principal offers a contract incentive. In view of Williamson, only the acts after the establishment of the contract (the contract is put in place only for the agent). In the Grossman and Hart, the principal is also involved in the contract terms. The choice of the theoretical structure implies different consequences and recommendations.
As Jacques CREMER in his working paper "Solving the Puzzle Selective Intervention" (TSE, March 2010), no company can be completely integrated vertically as each productive activity requires both upstream and downstream production of other goods or services, often complementary to each other . In sum, a firm tends to a perfect integration but can not get it completely. Also, no firm can be fully integrated, there will always be an input purchased from another contractor. Therefore, the question is to what degree a firm's interest to integrate.
Issue fundamental debate is that it calls into question the obvious too soon established. For example, what model you seem the most efficient between these two proposals: *
- a firm produces oil in a desert, it uses a pipeline to transfer its production to a central refinery. Each activity is being managed by a separate entity.
- A firm produces oil at sea, she uses a boat to transport production to a point in refining. Each activity is being managed by a separate entity.
The second proposal seems the least expensive Because including the establishment of complete contract is possible. In practice, the firm may subcontract the transfer of production to any company that specializes in shipping. However the pipeline involves a long-term contract and especially the use of a specific asset for each entity. Regardless, the third entity (pipeline) required for the transfer of production involves incomplete contracts. In this case integration is a far superior solution to the model with three separate entities.
Williamson shows that integration decreases the incentive. The three owners of the three separate entities that feel more responsible managers of a firm already integrated. However, as the model oil-refinery-transport shows, integration remains the most cost effective solution if the asset is specific to each activity. Regardless, the assets will be more specific, more integration will be a superior solution to a separate organization. On the other hand always in a vertical pattern, the upstream entity of a second entity has a greater ability to control. Considering the firm as the upstream entity, it a alors tout intérêt à s’intégrer.
L’enjeu de l’intervention sélective est aussi à mettre en parallèle avec le problème du hold up. Les deux concepts limitent la frontière de la firme. La distinction entre ces deux notions repose sur les engagements des managers. Dans une entité séparée d’une autre, les managers restent exposés au jugement du marché, en particulier sur le respect des objectifs initialement fixés. Si ces engagements ne sont pas vérifiés, il existe un risque de hold-up (processus où une firme intègre progressivement un sous-traitant à son propre schéma organisationnel) donc un risque que the subcontractor is vertically integrated with the client firm. Property rights are important variables in deciding what is integration. For these reasons, selective intervention is considered expensive. The firm must measure the opportunity cost of decreasing the incentive mechanism of the contract owner-manager. Costs that are considered by Williamson as illusory as it becomes impossible to maintain incentives at a constant level.
Williamson's contribution is to show the benefits of integration and offer contracts established on the principle that entities are not integrated to preserve maximum incentives.
However, this proposal has generated considerable criticism.
First, there is no evidence that the optimal contract after integration is a simple variation of the optimal contract without integration. It's a good idea but not proven. The second recommendation (organizing the firm as if it was separate entities) Williamson's life is not as relevant as the first (the integration is always preferable).
Masten (1999) stresses the need for an effective guarantee to encourage managerial divisions to innovate, make very profitable investments and reduce costs, or to remain efficient. Such an initiative would go beyond the theories of Williamson resigned under any circumstances contemplated the possibility of a centralized organization that retains all its power incentive. Selective intervention can not be verified.
One way to disprove and prove the falsity of Williamson on the still more profitable vertical integration is to show that is possible to earn an income at least as high with an organization separate entity. This requires that the contract applies mechanisms such as incentives for the agent to the principal. This is where Grossman and Hart in 1986.
Grossman and Hart believe that incentive mechanisms can be introduced by means of property rights. That the allocation of those rights that determine the power of incentive contract. Game theory analyzes the implementation of the contract that must be seen as a game and not organized as a simple desire to control the behavior agent. To simplify the model by Grossman and Hart (1986) is with 2 officers and 1 active. Hart and Morre (1990) have proposed an extension of the paper with more agents and more active.
In traditional theories, adverse selection was very static. The principal offers a contract to the agent who accepts or not to honor it. This contract is necessarily incomplete (since not all information can be written) so the agent operates within a predetermined by the principal. In the work of Grossman and Hart, it is simply a framework of action for both agents so that property rights facilitate the implementation of incentives. In addition, after signing the contract remains the principal as involved as the agent.
Riordan (1990) criticizes this view by showing that Grossman and Hart define vertical integration through the control of the asset when it is the ability to control the production system which defines vertical integration for Riordan .
For example, if the contract implies that the downstream firm can use capital and labor power of the upstream firm then there is no integration vertical sense of Grossman and Hart, while Riordan sees integration as such because the two firms start simultaneously in agreement on the internal management of the productive process.
But if the contract requires that the upstream firm leases an asset to the firm specific downstream while Grossman and Hart considers vertical integration where Riordan would say the opposite in view of non-participation of the downstream firm internal control of the upstream firm.
Bibliography:
Williamson, Oliver E. 1985, "The Economic Institutions of Capitalism: Firms, Markets and Vertical Contracting "
Klein, Benjamin, Robert C.Crawford and Armen A.Alchian 1978: " Vertical Integration, Appropriable Rents, and the Competitive COntracting Process. " The journal of Law and Economics
Crémer, Jacques, 1995 " Arm's Lenght Relatioships " Quaterly Journal of Economics"
Crémer, Jacques, 2010, " Solving the "Selective Intervention " Puzzle", TSE Working Paper
Nicolai J.Foss, Peter G. Klein, Richard N.Langlois, Lasse B.Lien : http://organizationsandmarkets.com
Grossman, Sandford H. and Oliver D.Hart. 1986 " The costs and benefits of ownership: a theory of vertical and lateral integration. " Journal of Political Economy 94
0 comments:
Post a Comment