Economists have become increasingly frustrated with the textbook model of the firm. The "firm " of intermediate microeconomics is a production function, a mysterious "black box" whose insides are off-limits to respectable economic theory (relegated instead to the lesser disciplines of management, organization theory, industrial psychology, and the like). Though useful in certain contexts, the textbook model has proven unable to account for a variety of realworld business practices: vertical and lateral integration, geographic and product-line diversification, franchising, long-term commercial contracting, transfer pricing, research joint ventures, and many others. As an alternative to viewing the firm as a production function, economists are turning to a new body ofliterature that views the firm as anorganization, itself worthy of economic analysis. This emerging literature is the bestdeveloped part of what has come to be called the "new institutional economics."' The new perspective has deeply enhanced and enriched our understanding of firms and other organizations, such that we can no longer agree with Ronald Coase's 1988 statement that "[wlhy firms exist, what determines the number of firms, what determines what firms do... are not questions of interest to most economists " (Coase 1988a, p. 5).The new theory is not without its critics; Richard Nelson (1991), for example, objects that the new institutional economics tends to downplay discretionary differences among firms. Still, the new institutional economics-in particular, agency theory and transaction cost economics-has been *Peter G. Klein is assistant professor of economics at the University of Georgia. He

Abstract not found

This paper investigates how firms choose among acquisitions, alliances, and divestitures when they decide to expand or contract their boundaries. The dataset covers 9276 deals announced and completed by 86 members of the Fortune 100 between 1990 and 2000. Our findings support explanations based on resources, transaction costs, internalization, organizational learning, social embeddedness, asymmetric information, and real options, and suggest that these theories are highly related and complementary. We find less consistent support for theories based on agency costs and asset indivisibilities. The strong role of firm attributes explains in part why firms may pre-specify whether they will pursue acquisitions, alliances, or divestitures as part of their corporate strategies. Copyright © 2005 John Wiley & Sons, Ltd.

This paper presents a model that complements the research stream of transaction cost economics with the dynamic capabilities approach. The paper shows that, even though technological alliances involving specific assets deployed in emerging industries are exposed to high transaction costs, they possess attributes that make them attractive. First, they facilitate the creation of tacit competencies, and second, they reduce the uncertainty arising from technological innovation and regulatory changes. The model is empirically tested in the hazardous waste management industry by using primary data collected through the use of questionnaires. The method links governance structure choices to managers' perceptions of the uncertainty surrounding the acquisition of technology

This paper examines the impact of vertical integration on the dynamics of performance in the context of automobile product development. Building on recent work in organizational economics and strategy, we examine a number of detailed case studies to evaluate the relationship between vertical integration and different performance margins. On the one hand, outsourcing facilitates access to cutting-edge technology and the use of high-powered performance contracts. On the other hand, vertical integration allows firms to adapt to unforeseen contingencies and customer feedback, maintain more balanced incentives over the product lifecycle, and develop firmspecific capabilities over time. Together, these effects highlight a crucial dynamic tradeoff: while outsourcing will be associated with higher levels of initial performance, vertical integration will be associated with a higher rate of performance improvement over the product lifecycle. We test these ideas with detailed data from the luxury segment of the global automobile industry. The data combine detailed performance measures over time with nuanced measures of the extent of vertical integration, as well as measures of the contracting and technology environment. We establish four key results. First, initial performance is declining in the level of vertical integration. Second, the level of performance improvement is significantly increasing in the level of vertical integration. Moreover, even after controlling for other factors impacting performance, the magnitude of these two effects are roughly identical – there is no relationship between vertical integration and “overall ” performance. Finally, taking advantage of outsourcing during the early part of the product lifecycle and internal development during the latter years of the lifecycle depends on the institutional and strategic environment. For example, the long-term benefits to vertical integration are erased for those firms with a strong union presence. Overall, the empirical findings highlight that the vertical integration decision reflects a dynamic strategic tradeoff between short-term performance and the potential for improvement over time.

Contract farming is a pervasive institutional arrangement in cash cropping economies in Mozambique. Empirical evidence on its nature and, especially, the extent to which policies can generate broad based income growth and poverty reduction is lacking. This study investigates the rationale for persistence, the determinants of farmer participation and performance in cotton and tobacco schemes (Essay One), and the economy-wide effects of expansion and shocks in cotton and tobacco sectors on poverty reduction in concession areas of the Zambezi valley of Mozambique (Essay Two). In the first essay, we find that in both sectors contract farming is an institutional response to widespread failure in input, credit and output markets and the absence of a functional public and market based service provision network. Two stage econometric procedures (testing for the existence of threshold effects in land holdings and educational attainment) indicate that in both areas participation in the schemes is driven by factor endowments, asset ownership and alternative income opportunities, and very little by demographic factors. Also, there are no returns to education in either sector; this result is consistent with previous research in Mozambique but surprising in an agronomically

*The authors would like to thank Betty Chung for word-processing assistance. 2

This paper surveys some economic applications of the decision theoretic framework pioneered by David Schmeidler. We have organized the discussion around three themes: financial markets, contractual arrangements and game theory. The first section discusses papers that have contributed to a better understanding of financial market outcomes based on ambiguity aversion. The second section focusses on contractual arrangements and is divided into two sub-sections. The first sub-section reports research on optimal risk sharing arrangements, while in the second sub-section, discusses research on incentive contracts. The third section concentrates on strategic interaction and reviews several papers that have extended different game theoretic solution concepts to settings with ambiguity averse players. A final section deals with several contributions that are linked only at a formal level, in terms of the pure mathematical structures involved, with Schmeidler’s models of decision making under ambiguity. The contributions involve issues such as, inequality measurement, intertemporal decision making and multi-attribute choice. JEL classification number: D81

High-technology companies that discover new technological opportunities face two critical decisions: whether and when to collaborate in exploiting these opportunities. Prior research has examined factors such as transaction costs that determine whether firms decide to collaborate. In this study we aim to understand when firms collaborate in exploiting opportunities. To this end we study the history of 86 biopharmaceutical product development projects. We find that factors that reduce articulation and appropriation uncertainties in these projects- patent protection, high R&D intensity of the firm, partners ’ prior collaboration experience, and support infrastructures in the industry- can speed up collaboration. Interestingly, project specific factors do not seem to affect timing. Key words: technological opportunities, product innovation, collaboration 2 This study examines how high-technology companies exploit technological opportunities. More specifically, we study how two characteristics of technological opportunities – the short window of opportunity and the different perceptions about the value of the opportunity among

Abstract not found