Oliver Williamson, Distinguished Fellow 2007

Oliver Williamson is one of the founding fathers of New Institutional Economics and arguably the scholar who launched Transaction Cost Economics. For the past four decades, he has been shaping the way economists think about firms, contracts and the economics of organizations.

Starting in his dissertation, published in 1964 as a book titled The Economics of Discretionary Behavior: Managerial Objectives in a Theory of the Firm, Williamson questioned one of the fundamental assumptions of the black-box theory of the firm: that managers maximize profit. Instead he argued that managers may spend money on items that enhance their own benefits at the expense of profits. Williamson’s arguments, and his efforts in tying them to real phenomena, predate the influential “empire building” literature in corporate finance by two decades. His dissertation set the path for a brilliant academic career that changed the way economists and students of organization theory view the role and functioning of firms and contractual relations.

In his influential article “The Vertical Integration of Production: Market Failure Considerations,” (1971), Williamson challenged the antitrust policy view that mergers are bad due to monopoly power, and laid the cornerstone of his two influential and much cited books, Markets and Hierarchies (1975), and The Economic Institutions of Capitalism (1985). In these books, Williamson develops Coase’s notion of transactions costs in ways that are tied to the actual workings of firms. Williamson argue that a combination of two factors hinders the abilities of firms to transact through the market: First, incomplete contracts implies a need for adaptation, and second, relationship specificity implies a “fundamental transformation” in that these adaptations will be negotiated under conditions of bilateral monopoly. This market failure is a key to the reason that some firms integrate.

Also noteworthy was Williamson’s observation that “selective intervention” cannot be performed: a large firm cannot do everything that a collection of small firms can do. Identifying the costs of integration was more challenging, however. Contemporaneously, Grossman and Hart (1986) offered a formal solution to the selective intervention puzzle by building on some of Williamson’s earlier insights.

Between the publication of these two books, Williamson published another influential article “Franchise Bidding for Natural Monopolies-in General and with Respect to CATV,” (1976), which showed his genuine desire to bring the fundamental ideas of transaction cost economics to bear on regulation policy. He refuted the Chicago view that with a natural monopoly like cable TV, franchises should be awarded to the most competitive bidder. Using Oakland as a case study, he demonstrated that, in a complex environment where complete contracts are impossible, regulation, while problematic, is superior to rigid franchise bidding.

Williamson’s influence through his development of transaction cost economics has reached far beyond the boundaries of the economics discipline. His work has been extremely influential for scholars of organization in sociology, and for researchers and practitioners of contract and corporations law. Oliver Williamson’s important contributions, together with his continuing efforts to push our knowledge further, make him a worthy member of the community of Distinguished Fellows.