| Abstract: |
This paper examines the institutional arrangements that develop when the risks
of opportunism and other contributors to transaction costs are high but
transactions are nevertheless necessary for economic efficiency. Williamson's
famous distinction between markets and hierarchies is inadequate because under
certain circumstances markets may be hierarchies that are deliberately managed
to reduce levels of transaction costs and undertake strategic objectives to
improve their competitiveness with other hierarchies, including other markets.
As transaction costs are production costs for these markets, careful
management increases the efficiency of the markets. As a result, some
important markets are also hierarchies that are structured in ways that are
analogous to firms precisely in order to reduce their costs of operation,
including the transaction costs that arise from using them. This paper looks
at the evolution of the membership rules of stock exchanges, a select but
important group of markets that have been consciously constructed over long
periods and with frequent modifications because of environmental change and
learning by participants. Stock exchanges belong to a category that also
includes insurance exchanges such as Lloyd's, and various markets involving
shipping and world trade. These are markets in which the use of up-to-date
information is especially important because conditions may alter quickly and
in which risk, uncertainty, and the potential for opportunistic behaviour are
factors that affect their operations in significant ways. Their productivity
as markets is (or historically has been) so high that their replacement by
hierarchies is virtually unthinkable because they allow for exchanges that
could not otherwise be accomplished smoothly. As a result, when transaction
and agency costs arise in such markets, responses have concentrated on finding
mechanisms for reducing them to tolerable levels rather than on abandoning
transactions altogether through the internalization of activities. The early
sections of the paper are devoted to an examination of the logic of
constructed markets, while the later sections examine how this logic worked
out in the case of the London, New York and Sydney Stock Exchanges in the
nineteenth and early twentieth centuries. |