Government Structures

Question 1

Markets

Answer 1

Governance structures that allocate resources efficiently through price mechanisms. Markets function best when asset specificity is low, contracts are enforceable, and switching costs are minimal.

Question 2

Market inefficiencies

Answer 2

As asset specificity increases, markets may face hold-up problems, increased bargaining costs, and inefficiencies, leading to the need for alternative governance structures.

Question 3

Hierarchies

Answer 3

Governance structures where firms internalize transactions to reduce uncertainty and opportunism, using organizational control instead of price mechanisms.

Question 4

Firms

Answer 4

Entities that replace market transactions with hierarchical control, reducing contractual hazards and improving coordination.

Question 5

Labor relations (“The Nature of the Firm”)

Answer 5

Firms internalize labor transactions because employment contracts are inherently incomplete. Hierarchical governance reduces renegotiation costs and provides long-term stability.

Question 6

Vertical integration

Answer 6

Firms internalize multiple stages of production to avoid transaction costs associated with external suppliers, particularly when asset specificity is high.

Question 7

Bureaus (Government Agencies)

Answer 7

Public sector hierarchies that function as governance structures but differ from firms by focusing on minimizing social costs rather than profit maximization.

Question 8

Outsourcing

Answer 8

A strategy where firms rely on external suppliers when markets provide cost-effective and specialized services without the risk of hold-up.

Question 9

Provision of public goods and services

Answer 9

Government agencies supply non-excludable and non-rivalrous goods (e.g., national defense, public health) that markets fail to provide efficiently due to free-rider problems.

Question 10

Regulation and property rights enforcement

Answer 10

Regulatory agencies enforce legal frameworks, mitigate externalities, and reduce transaction costs by securing property rights and standardizing interactions.

Question 11

State-owned enterprises (SOEs)

Answer 11

Publicly controlled entities that provide essential goods and services when private firms fail due to natural monopoly conditions or high social externalities.

Question 12

Hybrids

Answer 12

Governance structures that blend elements of markets and hierarchies, including relational contracts, alliances, and networks to balance uncertainty and asset specificity.

Question 13

Governing common pool resources

Answer 13

Hybrid arrangements such as cooperatives or public-private partnerships regulate access to shared resources (e.g., fisheries, irrigation systems) without full state control.

Question 14

Governance structures as an optimization problem

Answer 14

Governance structures evolve based on efficiency criteria, minimizing the sum of ex-ante contract writing costs, ex-post execution costs, and monitoring/enforcement costs.

Question 15

Ex-ante contract writing costs

Answer 15

Costs associated with specifying and enforcing contractual terms before a transaction occurs.

Question 16

Ex-post execution costs

Answer 16

Costs incurred when contracts need to be modified due to unforeseen contingencies.

Question 17

Monitoring and enforcement costs

Answer 17

Costs associated with ensuring compliance and resolving disputes within governance structures.