Tuesday, October 9, 2007

Modeling Hybrid Forms

For a long time, the theoretical understanding of hybrid forms and governance is still deficiently unsatisfactory. A major step forward in the understanding of such hybrid governance is Williamson's seminal 1991 paper in the ASQ, "Comparative Economic Organization: The Analysis of Discrete Structural Alternatives," and Holmström and Milgrom's equally important 1994 paper in the AER, "The Firm as an Incentive System."

While in the latest post of Organizations and Markets, another paper, "Both Market and Hierarchy: An Incentive-Systems Theory of Hybrid Governance Forms,"(an earlier version), written recently by Richard Makadok and Russell Coff of Emory University, is highly recommended. In this paper, the authors point out that in extant thinking on hybrid forms, the attributes of governance structures (authority, ownership, and incentives) move together simultaneously. Forms that are intermediate in this sense do exist - like joint ventures - but most hybrid forms do not fall neatly in the middle in terms of the relevant dimensions. They are market-like on some attributes and hierarchy-like on other attributes. Then the problem is, how to model this more complex picture of hybrids?

Makadok and Coff present a model starting from a small modification of the Holmström-Milgrom model: they assume that there may be cross-task synergies (or positive externalities) between costly-to-measure tasks and less-costly-to measure tasks. This will allow for the possibility of high-powered rewards in hierarchies, which was ruled out in Holmström and Milgrom(1994). Then more generalized combinations of authority (strong-weak), ownership (principal owns asset - agent owns asset), and rewards (weak-strong) can be explained.

This paper is regarded, by some strategic management scholars, as a promising one to take its place alongside Lippman and Rumelt (1982) as the most influential modeling paper(s) in the Strategy field.

By the way, following the original post, several comments and responses are recommended as well.

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