| Although the allocative efficiency of various institutional arrangements is one of the central themes of microeconomics, relatively little attention has been devoted to the systematic analysis of choice among alternative economic institutions. In this thesis, the choice between market and internal organization of production and exchange is viewed as part of the overall optimization problem faced by individual economic actors. In particular, a mathematical model is offered which analyzes the effects of certain critical factors on the incidence of transaction costs and, subsequently, on the relative efficiencies of spot markets, extended contracting and internal organization as alternative modes of governing a vertical production relationship.;Finally, the framework presented in the initial chapters is applied to an analysis of input procurement in the aerospace industry. Estimations based on actual procurement decisions in that industry as well as evidence drawn from both government and corporate procurement manuals strongly support the hypotheses of the model.;The model developed here confirms that (1) the more specialized and profitable are the investments associated with a particular transaction, the greater is the incentive to internalize production within the firm; (2) the more profitable future investments in specialized assets are expected to be (relative to current investments), the fewer the hazards from external procurement of supplies; and (3) the more complex the item or the more uncertain the associated environment, the less likely is a producer to acquire his inputs from an external source on a contractual basis. In addition, the length of contractual agreements is treated as an endogenous variable in the model. The analysis suggests that the span and duration of contracts are likely to increase with the specificity of investments, while uncertainty favors shorter term agreements. |
