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The Mechanisms of Governance.
Oliver E. Williamson. New York: Oxford University Press, 1996. 429 pp. $45.00.
Oliver Williamson's work has had enormous influence on the study of organization, bringing issues of governance to the center stage of analysis. The basic tenets of his transaction cost economics (TCE) are set out and developed in his two best-known works, Markets and Hierarchies (1975) and The Economic Institutions of Capitalism (1985), where he argues that, under certain conditions, hierarchical governance is less costly than market exchange. The Mechanisms of Governance is intended as the third installment in a transaction cost trilogy. Whereas earlier works focus on outlining the general framework underlying TCE, however, the primary aim of this book is to elaborate the notion of governance. Responding to criticisms that this central construct remains relatively underdeveloped in his earlier work, Williamson here seeks to operationalize the concept of governance in a way that is consistent with TCE's general model. Retaining the key behavioral assumptions of bounded rationality and opportunism, and focusing on situations of market failure that involve small numbers exchange between interdependent actors, he seeks to identify the mechanisms used to create order when "potential conflict threatens to undo or upset opportunities to realize mutual gains" (p. 12, emphasis in original).
The Mechanisms of Governance makes a number of important contributions that highlight both the considerable promise and the inherent limitations of TCE. The book is less systematic and more repetitious than its predecessors, primarily because it is a collection of previously published essays rather than an attempt to articulate a unified argument.' A key premise underlying the various chapters, however, is that distinct forms of governance employ "different means" to create order and regulate exchange. TCE here rejects the agency theory view that firms have "no power of fiat, no authority, no disciplinary action any different in the slightest degree from ordinary market contracting" (Alchian and Demsetz, 1972: 777). The notion of different means is meant to imply that there are a variety of distinct methods for "infusing contractual integrity" that cannot be reduced one to the other (p. 101). While agency theory treats governance as a matter of aligning incentives, TCE aims to focus more generally on the adaptive properties of governance structures. Incentive alignment...