Oliver Williamson

This photo was taken at the press conference on October 12, 2009. For whatever reason, this fellow seems to be pleased about something.

This photo was taken in Stockholm on December 10, 2009. I am holding the Nobel Citation and Medal conferred on me by King Carl Gustaf.

Remarks by Avinash Dixit (Princeton University)
AEA 2011 Meetings, Nobel Lunch Honoring Elinor Olmstrom and Oliver Williamson:

"[...] Oliver Williamson has reached the stratospheric level of being probably the most cited economist of all time. For most of us, to get an up to date citation count of our work, a weekly or even monthly check suffices. For Williamson, a day or even an hour can make a big difference. I had some commitments this morning and couldn't make a final check just before coming here, so I apologize if my numbers are badly out of date. But as of last night, Google Scholar gave the following statistics:

Economic Institutions of Capitalism: 20556
Markets and Hierarchies: 14357
Mechanisms of Governance: 3576
Transaction Cost Economics, in Handbook of NIE: 6457
Markets and Hierarchies, AER 73: 5777
Comparative Economic Organization, Admin Sci Q: 3667
8 other articles with >1000

Williamson redirected the focus of the economics of industry from the technological conditions of production to the informational and organizational conditions of transactions. He also recognized that organizational forms are themselves endogenous, capable of adapting to the needs of transactions. He crystallized this way of thinking as the "discriminating alignment hypothesis." Like all such broad principles, this expresses a tendency, not something that holds true precisely and at all times, but it is a tendency important to remember when we observe organizations and their dynamics, and recommend reforms.

The usual statement of Williamson's contribution is that he operationalized Coase's insight about the boundaries of the firm. He produced a much more detailed and nuanced analysis of the very broad catch-­-all category "transaction costs". He distinguished various kinds of these costs: [1] Complete contracts specifying actions in all conceivable contingencies are infeasible; ex post unprogrammed adaptations must be made. This stood in sharp contrast to the conventional view, most rigorously formulated in the Arrow-­-Debreu framework of general competitive equilibrium with complete contracts. [2] Many interactions require one party or the other to make relationship-­-specific investments; this reduces or even eliminates the check that competition can provide and creates the hazards of opportunism. This was a big departure from the tradition, attributable to the old Chicago school, where everything was flexible and strategic manipulations such as hold-­-up (or entry deterrence) were not possible. [3] The ex post bargaining that ensues in these situations can have inefficient outcomes. This was again contrary to much economic thinking based on the core or the Nash bargaining solution; models of strategic posturing in bargaining resulting in inefficiencies are quite recent.

Williamson's first application of these principles was to vertical integration. He argued that instead of viewing it as a way of increasing market power, we should view it as an adaptation to reduce the transaction costs involved in arm's length 4 dealing in an intermediate good, when its production or use requires specific investments, and contracts covering all contingencies of cost and demand changes cannot be written or enforced. The importance of specific investments, and contractual complexities and incompleteness, are matters that can be measured or proxied, and their implications for vertical integration can be tested. Indeed, such empirical work has provided good consistent support for Williamson's theories, which is admittedly a rather rare achievement in economics.

The hypothesis that organizational forms are (or should be) chosen to economize on transaction costs has produced many other empirically supported applications. It suggests not only whether two parts of the production process should be integrated into one firm, but also who should own that firm and control the residual decision rights. It connects law and economics, helping us understand when contracts will be made and enforced using relational or other private ordering, instead of relying on the court system. It also helps connect corporate finance with corporate governance. A firm whose assets are specific must be financed using more equity, because in the event of dissolution debt-­-owners could not benefit by seizing the assets. Williamson's work has inspired or intrigued other researchers to develop and explore these applications. Sanford Grossman, Oliver Hart, Bengt Holmström, Jean Tirole, Michael Jensen and William Meckling, and many others have constructed rigorous theoretical models of these and other situations. This work has in some cases clarified or refined Williamson's arguments, and in others has led to important new insights or modifications of the original ideas. Today's graduate students and young researchers study organization theory in this new garb. However, we should not forget the debt that these subsequent researchers, and indeed all of us, owe to Williamson's pioneering work."