The hikers & the tiger
Exercise
Analyze the following critique from a Transaction Cost Economics perspective. If possible, skim before the first Chapter of Williamson’s The Economic Institutions of Capitalism (1985).
In business circles, a story is often told of two hikers who wake up one night to find a tiger lurking near their tent. One of the hikers immediately reaches for his running shoes. On being reminded by his partner that he could not possibly outrun the tiger, he responds that all he has to do is to outrun the partner. At a superficial level, the somewhat macabre humor of the situation also serves as a powerful reminder of the similarities between biological and economic competition. Survival of the fittest and, hence, the need to be the fittest, is seen as the moral of the tale.
On (still) deeper reflection ... the story reveals a set of assumptions and their self-fulfilling and ultimately debilitating consequences for the hikers that directly contradict the firstcut analysis. We begin our critique of transaction cost economics (TCE) with this story because much of TCE ... is based on a very similar set of assumptions with similar debilitating consequences for organizations whose managers knowingly or unknowingly adopt its prescriptions.
The first assumption is regarding human nature. In reaching for his shoes instead of considering any collaborative action with his partner, the first hiker represents the ‘model of humans’ that is embedded in Williamson’s brand of TCE logic. His behavior is opportunistic (i.e., an expression of ‘self-interest unconstrained by morality’) (Milgrom & Roberts, 1992). In deciding to abandon his partner, he assumes that he has no choice because he cannot be certain ex-ante that his partner will not behave opportunistically, and ex-post discovery can be costly (Williamson, 1975).
The second assumption is regarding the requirement for success. What matters is the speed of running, because that is the strength of the tiger. Going up a tree, or lighting a fire, or any other such ‘strategic’ actions are not contemplated. Rather, ‘efficiency’ within predefined rules of the game is the criterion that determines the desirability of the outcome (Williamson, 1991d).
In a world of hikers and tigers, given these two assumptions, tigers will ultimately prevail. Even if one hiker survives the first encounter by outrunning his partner, he would succumb in some subsequent encounter either to a faster partner or simply because he would soon run out of partners and would have to go hiking alone (Ghoshal and Moran, 1996, pp. 13-14).
Analysis
This was Williamson’s answer to the criticism in “The Hikers and the Tiger”.
Ghoshal and Moran deflected attention from the main research agenda of transaction cost economics by their suggestions that the tiger story goes to the essence of the enterprise and that transaction cost economists are preoccupied with illegality. Both are incorrect. Suppose, however, that we them take them seriously. What insights, if any, would transaction cost economics afford to prospective hikers in tiger country?
Note that I refer to prospective hikers rather than hikers who are confronted with hazards for which there has been no knowledge aforethought. This is an important distinction, and it is responsible for some of the key differences between transaction cost economics and those parts of the organization theory literature that feature myopia (Williamson, 1993). Whereas myopic parties must rely on altruism when a bad state realization occurs, lest one party take advantage of the other farsighted parties who take hazard-mitigating actions in advance are less subject to the same vicissitudes.
Thus suppose that a farsighted male hiker is contemplating a hike into an area man-eating tigers are known to roam. He might on this account decide to bring a weapon, and he might also consider not going alone. Suppose that the population of those that he could approach is divided into those who have the following reputations for working together: “good”, “bad”, and “unknown”.
All else being equal, he will approach members of the good group first. In the event that only those from the bad group are available, he might cancel the hike or reroute it through less dangerous terrain. He will work out added precautions, including contingent responses to possible threats, in advance. Also, there will be added expenses for him (learning more about those with unknown reputations), if he contemplates hiking with unknowns.
Ghoshal and Moran considered none of this. Instead, they told a myopic contracting story that is wholly at variance with the credible contracting literature to which transaction cost economics contributes and relates. The entertaining story with which they introduce their article misconstrues the theory and promotes confusion (Williamson, 1996, pp. 13-14).
References
- GHOSHAL, S., and P. MORAN, “Bad for Practice: A Critique of the Transaction Cost Theory,” Academy of Management Review, Vol. 21, 1996, no. 1, pp. 13-47.
- WILLIAMSON, O.E., “Economic Organization: The Case for Candor,” Academy of Management Review, Vol. 21, 1996, no. 1, pp. 48-57.
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