Companies, markets, and management of common property. On the Nobel Prize in Economics awarded to Elinor Ostrom and Oliver E. Williamson

Abstract

Oliver Williamson has argued that markets and hierarchical organizations, such as firms, represent alternative governance structures that differ in their approaches to resolving conflicts of interest. The drawback of markets is that they often entail haggling and disagreement. The drawback of firms is that authority, which mitigates contention, can be abused. Competitive markets work relatively well because buyers and sellers can turn to other trading partners in case of dissent. But when market competition is limited, firms are better suited for conflict resolution than markets. A key prediction of Williamson's theory, which has also been supported empirically, istherefore that agents' propensity to carry out their transactions within their respective companies rises with the degree of specificity of the goods involved in the relationship between the contracting parties. Elinor Ostrom has challenged the conventional wisdom that common property is poorly managed and should be either regulated by central authorities or privatized. Based on numerous studies of user-managed fish stocks, pastures, woods, lakes, and groundwater basins, Ostrom concluded that the outcomes are, more often than not, better than those predicted by standard economic theories, as resource users frequently develop sophisticated mechanisms for decision-making and rule enforcement to handle conflicts of interest. In her work, she has described the rules that promote successful outcomes.