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The institutional structure of production revisited

Published online by Cambridge University Press:  19 January 2015

ENRICO ROSSI
ENRICO ROSSI*
Affiliation:
Management Department, The London School of Economics and Political Science, London, UK
*
*Email: [email protected]
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Abstract:

This paper revisits Coase's original description of the Institutional Structure of Production, and disentangles its two constitutive elements: (i) the costs of organizing an activity internally and (ii) the costs deriving from the transaction of the activity on the market. In doing so, I show transaction costs (TC) to be always necessary and sufficient to explain institutions, but only in the Slutsky–Hicks and Samuelson ordinal framework where expenditure functions replace utility functions and actors merely transact services and never control, nor own goods. Yet, if actors can purchase (and therefore control) resources, utility in use cannot be univocally deduced from purchasing behaviours; here ordinal exchange theory must be replaced by Austrian subjective cardinal value theory, where value in use and value in exchange do not coincide. To explain the allocation of activities among firms in this case, actors’ subjective opportunity costs are thus always necessary (and possibly sufficient), while TC are never sufficient. This distinction has fundamental implications for at least two main developments of Coase's original insights: the relationship among competition, socialist planning and the nature of the firm, and the reinterpretation of the Austrian concept of asset specificity in contemporary institutional and organizational economics (OE).

Type
Research Article
Information
Journal of Institutional Economics , Volume 11 , Issue 2: Ronald H. Coase Memorial Issue , June 2015 , pp. 301 - 327
Copyright
Copyright © Millennium Economics Ltd 2015 

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