On the Transaction Cost Determinants of Vertical Integration

The transaction cost approach to the organization of firms has been among the most significant advances in industrial organization in the last 25 years. Much of this work has taken the transaction cost economics view of Williamson (1975, 1979, 1985) and Klein, Crawford, and Alchian (1978) in which high levels of quasi-rents are taken to increase the likelihood of vertical integration. More recently, however, the more formal property rights theory of Grossman and Hart (1986) and Hart and Moore (1990) has received considerable attention as a theory of integration. This article explores the predictions of property rights theory to assess what the extensive supporting evidence on transaction cost economics tells us about the property rights theory's empirical relevance. The article concludes that this evidence sheds little light on the relevance of the property rights theory and discusses how we might try to learn more.