Ownership, Technology and Institutional Stability

Abstract

This paper shows that the traditional New Institutional argument can be inverted. The specificity and the monitoring characteristics of the resources (agency cost characteristics of resources) influence property rights and organizational form but, in a world of positive transaction costs, also the opposite is true: property rights and organizational form do influence the agency cost characteristics of the resources.

For a given technology, the ownership of the firm goes to the high-agency-cost factors because they can save the most on agency costs when they own the organization. At the same time, owning factors choose technologies that save on the use of other high-agency-cost factors. As a consequence, non-owning factors tend to become general purpose and easy to monitor - that is "bad alternative owners".

In a formal model, we show that ownership and technology define self-reinforcing multiple "organizational equilibria". We also show that the "institutional stability" of an organizational equilibrium depends on the possibility of substituting non-owning high-agency-cost factors. It increases together with the value of the elasticity of substitution. The upshot is that organizational equilibria may be institutionally very stable even when they are inefficient.

Keywords: Institutions, Varieties of Capitalism, Organizational Equilibria

JEL Classification: L2, M2, P1, P5