Williamson’s Contributions to Our Understanding of Public Sector Institutions

By Pablo T. Spiller*

One of the less well-known areas of Williamson’s contributions to economics and to the social sciences more generally is in our understanding of public sector institutions. He approached these institutions similarly to how he approached private ones. His view was based on a simple tenet: that all feasible organizational forms, including those of public institutions, are flawed. Thus, as with private ones, their performance, role, and organizational forms must be assessed in relation to the types of activities they handle and analyzed within the proper institutional comparison. Merely because an organization or the performance of a public institution looks flawed or inefficient does not mean that, for the activities it handles, there are readily available alternatives that can perform significantly better. Williamson’s 1976 “Franchise Bidding” article,** was his first full-fledged analysis of a public institution--in this case franchise bidding for a natural monopoly. In the article he showed that by analyzing the real-world features of franchise bidding, one finds that its operationalization may actually lead to the same “flaws” that characterize the regulatory form it was supposed to supplant (e.g., rate of return regulation). In other words, franchise bidding may fail the remediableness*** test as it relates to more standard regulatory forms, at least for some activities such as CATV.

This approach to the analysis of public institutions has seen applications across a wide range of public institutions, such as the design of regulatory policy, agencies and procedures, fiscal programs, legislative organizations, judicial behavior, procurement rules and programs, the workings of NGOs, the role of interest groups, and many other settings, with empirical applications and case studies undertaken throughout the world, showing the power of transaction costs analysis beyond private contracting and the internal organization of firms.

On a personal note, I was initially exposed to Williamson’s ideas when I was doing my MA at the Hebrew University of Jerusalem, and working with the late Don Patinkin. He encouraged me to read Knight’s “Risk and Uncertainty” which led to me to read Williamson’s “Markets and Hierarchies.” For some good reason, probably my incredible jutzpah, I decided to write Williamson to mention that his treatment of risk was inconsistent with Knight’s. Lo and behold, a month later I received a letter commending me for my interest and encouraging me to read further into his book, so that I will see that there is a reconciliation! From the Hebrew University I went to do my PhD at the University of Chicago where, at least at the time, Williamson was not part of the required readings. When, in 1980, I went to the job market, I was surprised not only to receive an interview with Penn, where Olly was at the time, but later a visit invitation and a job offer, which I accepted. I never imagined, though, that I was signing up not just as an assistant professor of economics, but also as a student at Olly’s post-doctoral program in transactions costs economics! I soon fell under his intellectual influence and became an active participant in this expansive intellectual pursuit. At Penn and particularly later at the Haas School at Berkeley, where Olly moved in the late 1980s and I followed in the early 1990s, he was able to attract great students and colleagues to a truly interdisciplinary program dealing with both private and public institutions. The workshop we ran at Berkeley, the Transaction Costs Workshop – later renamed the Oliver Williamson Workshop (which was registered as an IDS, that is, an inter-disciplinary studies course) and it provided a highly fertile and successful ground for the development of the transaction cost approach to public institutions. Many of our students and colleagues wrote on these issues and provided the impetus for the expansion of Olly’s transaction cost framework across disciplines.

It was a wonderful journey and I was lucky to have been part of it. I was lucky again when a few years later I purchased a house just across the street (and uphill) from his on Tamalpais Rd. This meant that for many years I was the only economist who could say without hesitation that I could (literally) look down on Williamson! But as is clear from these few lines, while my residence may have been physically above his, my professional work has resided intellectually on his shoulders. For that and for his friendship I remain immensely grateful. ______________

*Pablo T. Spiller is the Jeffrey A. Jacobs Distinguished Professor in Business and Technology, the University of California, Berkeley. He served as President of SIOE (then called ISNIE) 2009-10.

** See, Williamson, Oliver E. “Franchise bidding for natural monopolies-in general and with respect to CATV,” The Bell Journal of Economics, Vol. 7, No. 1 (Spring, 1976), pp. 73-104. The Nobel Committee, however, failed to mention his contributions to this area, a failure, which as I mentioned in my 2010 CMR essay honoring Williamson’s Nobel Prize, is shared by the economic profession as a whole.

*** The remediableness criterion was more fully developed in his 1996 “Mechanisms of Governance” book and further in his 1999 “Public and Private Bureaus” article. See, Williamson, Oliver E. The Mechanisms of Governance. Oxford: Oxford University Press. 1996, and Williamson, Oliver, 1999. "Public and Private Bureaucracies: A Transaction Cost Economics Perspectives." 15 Journal of Law Economics and Organization, pp. 306-42.