Production Functions, Transactions Costs and the New Institutionalism

Abstract

For most of the postwar period, economic theory has focused on the analysis of impersonal markets. In the past few years, however, there has been a resurgence of interest in the role of institutions in the allocation process: why does some behaviour take place within firms and not within markets? Why are long-term contracts used instead of spot markets? What What determines the structure of long-term contracts? How does the internal organization of a firm affect its performance? Why are some workers compensated by piece-rates, others by hourly wages, and still others by annual salary? What are the effects of seniority provisions or of a legal prohibition of termination of employment contracts at will? Does the structure of employment contracts have an influence on macroeconomic variables? What are the effects of alternative tort liability systems on accident rates? And so forth.

This author would like to thank the following for comments on an earlier draft: Moshe Adler, Avner Ben-Ner, Ronald Coase, Douglass North, Joseph Ostroy, David Teece, and Oliver Williamson.