important kind of safeguard is an organization, or what he calls a “hierarchy,” that is, deciding to
produce a particular input internally rather than rely on market supply. Organizations (such as
firms) are thus created for the purpose of economizing on transaction costs – and, more broadly,
the governance mode (market, organization/hierarchy, or intermediate) selected for a given
transaction will be the one that maximizes efficiency given transaction costs.
In thinking about the boundaries of campaign organizations, I will consider the potential
value of six propositions from the literature on the boundaries of firms: three core hypotheses
from Williamson (1975, 2002) and three more loosely-formulated propositions combining ideas
from Williamson with ones drawn on a mix of other sources (including Holmström and Roberts
1998 and Simon 1991). These propositions can be briefly stated as follows:
[1] Internal organization increases with frequency: When a given transaction occurs more
frequently, it becomes more likely that it will be organized internally rather than as a market
exchange. This is because (among other reasons) high frequency spreads the fixed costs of
organization over a larger number of transactions.
[2] Internal organization increases with uncertainty: When a transaction is more uncertain –
subject to more disturbances (Williamson 2002: 175) – it becomes more likely that internal
organization will be chosen. The risks of market exchange and the difficulties of drawing up a
sufficiently complete contract increase with the complexity of the transaction in question.
[3] Internal organization increases with interdependence: As the mutual dependence of two
contracting parties increases, it becomes more likely that they will seek security in an
organizational framework rather than relying on market transactions. As with uncertainty, the
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Not all of this argument is original to Williamson – as he is well aware. The fundamental insight, running back to
Coase (1937) is that while organizations certainly have costs (first and foremost the administrative costs necessary
for internal coordination), market transactions have costs as well, even though no formal charge is being levied for
the transaction. As a result, which is the more efficient (relatively cheaper) of these two alternatives, markets or
organizations, is not an established fact but may vary from case to case.
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Convention