DECEMBER 28, 2004

.... One of the tasks of transaction cost economics is to asssess purported bureaucratic failures in comparative institutional terms.

The basic argument is this: it is easy to show that a praticular hierarchical structure is beset with costs, but that is neither here nor there if all feasible forms of organization are best with the same or equivalent costs. Efforts to ascertain bureaucratic costs that survive comparative instiutional scrutiny are reported elsewhere (Willimson, 1975, chapter 7; 1985 chapter 6), but theser are very provisonal and preliminary. Although intertemporal transformations and complexity are recurring themes in the study of bureaucratic failure, much more concerted attention to these matters is needed.

Source: Transaction Cost Economics and Organization Theory; Williamson, Oliver; in dosi_ea_1998 p.29

The inefficiencies that result from compromise are illustrated by the design of the Occupational Safety and Health Administration (OSHA), (Moe, 1990, p.126):

If business firms were allowed to help design OSHA, they would structure it in a way that it could not do its job. They would try to cripple it.

This is not a hypothetical case. Interest groups representing business actually did participate in the design of the OSHA ….. [and] OSHA is an administrative nightmare, in large measure because some of its influential designers fully intended to endow it with structures that would not work.

To be sure, private sector organization is also the product of compromise. Egregious inefficieny in the private sector is checked, however, by competition in both product and capital markets. [Source: ibid p.30]