An influence-cost model of organizational practices and firm boundaries

Michael Powell*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

6 Scopus citations

Abstract

This paper combines Milgrom and Roberts's influence-activity paradigm with the alienable control-rights approach of the Property Rights Theory to develop a unified theory of organizational practices and firm boundaries. Business relationships are optimally organized to curtail influence activities-costly activities aimed at persuading decision makers. Sometimes, rigid organizational practices that reduce ex post decision-making quality may be adopted if they reduce managers' incentives to engage in influence activities. Unifying control (integration) may improve ex post decision making, but it intensifies disempowered managers' returns to influence activities unless accompanied with rigid organizational practices. Interpreting influence costs under non-integration as "haggling costs" between firms and rigid organizational practices under integration as "bureaucracy". this model provides a unified account of the costs of both markets and hierarchies that accords with Williamson's classic trade-off. Under this view, however, bureaucracy within firms is not a cost of integration, but rather an endogenous response to influence activities. (JEL D02, D23, D73, D83.).

Original languageEnglish (US)
Pages (from-to)i104-ii142
JournalJournal of Law, Economics, and Organization
Volume31
DOIs
StatePublished - 2015

ASJC Scopus subject areas

  • Economics and Econometrics
  • Organizational Behavior and Human Resource Management
  • Law

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