Transaction costs, the theory of the firm, and the organization of production

The research in this dissertation is intended to improve our understanding of the nature of the firm and the organization of production. In the introductory chapter, I present the development of the transaction cost theory of the firm. The theory has centered on the implicit costs of transacting when investments are specific to a relationship and contracts are incomplete. In contrast, empirical evidence suggests that the explicit costs of transacting are potentially more important---in manufacturing the wages of all production workers are approximately equal to the wages of all non-production workers. Therefore, I discuss an alternative way of modeling transaction costs, namely as transaction processes complementary to production, which provides a new perspective on the notion of team production and the gains from specialization.; The problem of vertical integration has attracted considerable attention from the transaction cost literature. The standard argument is that investment specificity and incomplete contracting lead to suboptimal investments and therefore integration may be adopted to improve investment incentives. In the second chapter, I provide a game theoretic model of the integration problem and show that the possibility of integration increases investment incentives and there is no integration in equilibrium. Therefore, I conclude that investment specificity and incomplete contracts are not sufficient for integration.; In the third chapter, I provide a general equilibrium model of the organization of production. I model management and transaction costs by introducing an organizational technology that determines the production set of a firm as a function of the production processes the firm operates. Under standard assumptions, I prove the existence of an equilibrium and show that an equilibrium allocation is Pareto optimal, and therefore the organization of production is efficient. The main difficulty in the analysis is the nonconvexity of the production set due to indivisible production processes.; Finally, the concluding chapter contributes to the literature on the comparative analysis of institutions by providing a model of the political process which illustrates how the democratic structure of an economy may affect the performance of the government. The analysis indicates that institutions which increase political competition, such as a Plurality system, decrease the relative importance of campaign resources for generating political support. This in turn decreases the ability of organized interest groups to influence policy and increases the performance of the government.