Beyond Generics: A Closer Look at Hybrid and Hierarchical Governance Defended on Thursday, 25 October 2001

This study is about disaggregating the generic modes of governance as they are defined in Transaction Cost Economics (TCE). More specifically, it intends to increase the level of resolution of TCE in the field of hybrid and hierarchical governance by specifying (some of) the subcategories of governance within these two generic modes and relating these subcategories explicitly to the transactions they control. It is argued that such a disaggregation is useful for two main reasons: (1) it may increase the accuracy of TCE's predictions and may improve the expressiveness of its style of explanation, and (2) it may enlarge the conceptual scope of TCE, opening up problem areas that previously did not fit neatly into the realm of this approach. This general idea ties together the two substantive parts of this study. The first of these starts from the empirical observation that hybrid structures sometimes survive conditions of substantial uncertainty -an observation that does not go particularly well with received TCE-, and examines two cases of hybrid contracting in such conditions. It is argued that both cases are examples of a hitherto ignored subcategory of governance that, once identified, restores TCE's ability to explain this observation. The second part brings TCE's explanatory apparatus to bear on issues of management control. It is shown that TCE supports a detailed study of control issues, and that it has much to offer to the explanation of control structure variety within (and beyond) the hierarchy. Hybrid contracting and uncertainty There is a growing body of empirical evidence showing that sometimes, hybrid structures are chosen for transactions that combine substantial asset specificity with significant uncertainty. This evidence meets uneasily with TCE. Extant TCE suggests that for such transactions, hierarchical governance with its distinctive blend of cooperation-inducing features and sequential adaptation is uniquely suited. The hybrid form, on the other hand, is considered viii infeasible in conditions of uncertainty, because it requires a fairly complete ex ante explication of the particulars of the transaction. In this study, I argue that TCE's somewhat overstated position on the infeasibility of hybrid contracting in conditions of uncertainty is best be rectified by taking a closer look at the mechanisms of governance on which apparently uncertainty-resistant hybrids rely. It may very well be that extant TCE puts too much emphasis on compliance arrangements, and that there are in fact different (configurations of) control mechanisms available to the hybrid form to mitigate opportunism. An analysis of two generalized cases of hybrid contracting in conditions of asset specificity and uncertainty (outsourcing in the Japanese automobile industry and venture capital financing) revealed the contours of a subcategory of the hybrid mode that, unlike its more familiar compliance-focused counterpart, allows substantial contractual incompleteness. This subcategory invokes both market-based incentives and intensive exchange of information. The market-based incentives foster behaviour congruence without requiring performance goals or standards to be specified in advance, whereas information exchange and the resulting transparency allow significant direct control over the actions of the contracting partner during the process of contract execution. The combination of the two facilitates harmonious interim adjustment and correction, and in both cases, this configuration of governance devices seemed an efficient solution to the relevant contractual problems. Transaction Cost Economics and Management Control One of the quintessential problems of management control (MC) as a field of scholarly inquiry is to explain control structure variety within and between organizations. However, previous theorizing in MC has not been able to address this issue fully satisfactorily. In this study, I suggest that substantial progress can be made by applying TCE to the issue at hand. MC shares its central problem - explaining control- with TCE, albeit that the former requires a higher level of resolution. The logic of TCE, however, is receptive to refinement, and supports a detailed study of control issues at the level of organizational subsystems. At that analytical level, I propose a transaction cost ix theory of MC. This theory specifies the composition of various archetypal control structures, and links these to the kind of activities they are expected to control. The argument runs as follows. The nature of the organizational activities and the contributions from organizational participants that are required to perform these activities can be defined discriminatingly through their scores on three dimensions: (1) the extent to which the contributions are susceptible to up front programming; (2) the degree of asset specificity; and (3) the intensity of ex post information impactedness. Given bounded rationality and opportunism, these features are predictably associated with distinctive control problems that need to be dealt with. The various control archetypes differ in their problem-solving ability, which makes them appropriate for the governance of some contributions, but not for others. Moreover, they differ in respect of cost, and ultimately, an empirically observable alignment of a contribution with a control archetype can be explained by delineating the relative efficiency properties of the match, either quantitatively or - more likely- in a qualitative way. This theoretical approach has some qualities that make it worth considering. For one, it is empirically testable. Furthermore, its relatively simple theme seems to speak to a wide empirical domain, and can be used to make sense of a large set of remarkably different control structures in a consistent and coherent way. And finally, the proposed theory offers a practicable procedure to handle the issue of defining the organizational goals that MC is supposed to serve, and an operational way to address control structure effectiveness.


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