ABSTRACT
Since Coase (1937) first explained that firms economize on transaction costs, increasing attention has focused on organizational structures in order to understand the rationale behind firms’ contractual arrangements. As discussed in earlier chapters, transaction costs may be lowered through the selection of appropriate contractual forms that match the physical attributes of the activities undertaken and the institutional characteristics of production units and agents. At the firm level, production of a good or service occurs either by contracting out the activity or doing it in-house. Generally speaking, activities tend to be performed in-house if they are complex to manage, requiring high levels of human skill, occur frequently, and/or involve highly specific physical assets.
