Testing Alternative Theories of the Firm: Transaction Cost, Knowledge-Based, and Measurement Explanations for Make-or- Buy Decisions in Information Services

OLIN-97-03

Posted: 11 Aug 1997

See all articles by Laura Poppo

Laura Poppo

University of Kansas - School of Business

Todd Zenger

University of Utah

Date Written: April 1997

Abstract

Firms' boundary choices have undergone careful examination in recent years, particularly in information services. While transaction cost economics provides a widely tested explanation for boundary choice, more recent theoretical work advances competing knowledge-based and measurement cost explanations. Similar to transaction cost economics, these theories examine the impact of exchange attributes on the performance of markets and hierarchies as institutions of governance. These theories, however, offer alternative attributes or alternative mechanisms through which the same attributes influence make-buy choices. Traditional empirical specifications of make-buy models are unable to comparatively test among these alternative theories. By developing and testing a model of comparative institutional performance rather than institutional choice, we examine the degree of support for these competing explanations of boundary choice. Hypotheses are tested using data on the governance of nine information services at 152 companies. Our results suggest that a theory of the firm and a theory of boundary choice is likely to be complex, requiring integration of transaction cost, knowledge-based, and measurement reasoning.

JEL Classification: D21, D23

Suggested Citation

Poppo, Laura and Zenger, Todd R., Testing Alternative Theories of the Firm: Transaction Cost, Knowledge-Based, and Measurement Explanations for Make-or- Buy Decisions in Information Services (April 1997). OLIN-97-03, Available at SSRN: https://ssrn.com/abstract=10993

Laura Poppo (Contact Author)

University of Kansas - School of Business ( email )

Lawrence, KS 66045
United States

Todd R. Zenger

University of Utah ( email )

David Eccles School of Business
1655 East Campus Center Drive
Salt Lake City, UT 84112
United States
801 585-3981 (Phone)
801 581-7939 (Fax)

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