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OrganizingInformation Outside the Firm Contracts as Hierarchical Documents Introduction Coase (1937), Dahl and Lindblom ([1953] 1976), Williamson (1975), Teece (1976), and Lindblom (1977, 27-29, 237-309) have all built and used a contrast between market transactions among firms and hierarchical administration within firms. The basic notion is that when many adjustments will have to be made during the course of contract performance , the transaction costs of negotiating and enforcing contract rise, and the great flexibility of a labor contract used to create a hierarchy saves transaction costs (see Williamson 1975, 64-72). Thus, whenever it is difficult to specify the required performance in advance (Marschak, Blennan , Jr., and Summers 1967, 64-72), when the costs, prices, or quantities to reign at the time of the performances are uncertain (Macaulay 1963), when team interdependences do not allow separate measurement of performances (Alchian and Demsetz 1972), hierarchy is preferable to market coordination through contracts. The argument of this chapter is that contracts are often signed between a corporate client and a corporate contractor when this theoretical tradition predicts hierarchical integration. Although research and development in commercial life is ordinarily carried out by a subordinate R&D staff, as Mansfield et al. (1977) predict,1 the government buys weapons R &D by contracts under the same conditions of uncertainty of performances.2 Uncertainty about costs, prices, and quantities frequently leads to vertical integration, as Thompson predicts (J. Thompson 1967), but automobile franchises and weapons procurement often involve contracts for shifting quantities, uncertain costs, and prices to be determined (see Macaulay 1966; and Scherer 1964). Team performance of technically interdependent production often leads to hierarchical controls, as predicted by Alchian and Demsetz (1972), but airlines penetrate deeply into the technical work of airplane manufacturers.3 And in rushed mega194 6 Organizing Information Outside the Firm I 195 projects in energy production, the intimate technical dependence of engineering and construction does not prevent their being split between contractors. Performances can be adjusted to changing situations by contractual means; administrations of performances can be set up by other kinds of contracts than labor contracts. If the easy way to get flexible continuous performance over time is with a hierarchy isolated from direct market processes, we need to ask how people manage who are forced by their situation to do it the hard way. The literature that predicts why, for example,weapons development or building construction will be vertically integrated should predict what kinds of difficulties weapons and construction contracts will run into. Then we can look for attempts to solve such problems by writing administrative provisions into the contract. What we will be looking for isways to construct social structures that work like hierarchies out of contracts between legally equal corporate bargaining agents in a market. In the next section, we will analyze very briefly what kinds of social relations hierarchies consist of, and what functions they perform. This then provides an outline of what the functions are whose occurrence in contractual situations will lead to hierarchical elements in contracts. It may also suggest the nature of the structures that may intrude into the ideal type of market transaction, producing a variant of the ideal-type contract. The ideal-type contract is defined here to include all market transactions in which one firm or person makes an offer and another accepts . An offer and acceptance create legal obligations, whether or not a written contract is signed. In the ideal-type contract, the performances the offering party offers to perform are clearly specified, and the performances it will require in return are clearly described, though these may be implicit. Thus, a store's display of papayaswith a sign, "Papayas, $2.39 each," is an offer, and carrying them to the cash register and paying the money is an acceptance, creating a contract. This contract is hardly ever written, except as a cash register receipt. The papayas are specified by being on display; the performance of the buyer has a meaning defined by laws of legal tender and sales tax laws and by the sign. Legal obligations created include the store's obligation to let the customer have the papaya and the customer's obligation to take it away, to suffer the consequences if it is dropped on the way home, and the like. A contract with hierarchical elements departs in many ways from such an ideal type; those bring it closer to the description of a hierarchy we offer in the next section. Some conditions make it difficult, uneconomical, or...

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