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A Modern Reader in Institutional and Evolutionary Economics

Key Concepts

Edited by Geoffrey M. Hodgson

In the 1990s, institutional and evolutionary economics emerged as one of the most creative and successful approaches in the modern social sciences. This timely reader gathers together seminal contributions from leading international authors in the field of institutional and evolutionary economics including Eileen Appelbaum, Benjamin Coriat, Giovanni Dosi, Sheila C. Dow, Bengt-Åke Lundvall, Uskali Mäki, Bart Nooteboom and Marc R. Tool. The emphasis is on key concepts such as learning, trust, power, pricing and markets, with some essays devoted to methodology and others to the comparison of different forms of capitalism. An extensive introduction places the contributions in the context of the historical and theoretical background of
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Chapter 5: Determinants of supplier dependence: an empirical study

Hans Berger, Niels G. Noorderhaven and Bart Nooteboom


Hans Berger, Niels G. Noorderhaven and Bart Nooteboom* INTRODUCTION According to transaction cost economics (TCE), as formulated by Oliver Williamson (1975, 1979, 1985, 1991), the governance of vertical interfirm relations is determined predominantly by the degree to which assets are specific to the transaction relation. In the absence of safeguards, asset specificity leads to vulnerability to opportunistic rent-seeking by the other party (Klein, et al. 1978). Therefore the alignment of the level of asset specificity and the configuration of safeguards is important. The basic explanatory scheme of TCE is given in Figure 5.1. ASSET SPECIFICITY SAFEGUARDS Figure 5.1 A simple model based on TCE At low levels of asset specificity arm’s-length market relations are expected because, in the absence of relation-specific assets that need to be protected, this governance structure is efficient and offers strong incentives. At high levels of asset specificity, on the other hand, market relations break down because the firm incurring the specific investments finds insufficient 76 Determinants of supplier dependence 77 protection. Therefore, integration of both firms under common ownership and hierarchical control of transactions is to be expected. At intermediate levels of asset specificity, full integration would not be efficient, but a governance structure offering more protection than a pure market relation will have to be erected. In this case the relationship is more durable and tight than the typical market relationship, but at the same time looser than the relationship between...

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