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A Transaction Cost Approach to Families and Households Author(S): Robert A American Economic Association A Transaction Cost Approach to Families and Households Author(s): Robert A. Pollak Source: Journal of Economic Literature, Vol. 23, No. 2 (Jun., 1985), pp. 581-608 Published by: American Economic Association Stable URL: https://www.jstor.org/stable/2725625 Accessed: 04-10-2019 16:26 UTC JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact [email protected]. Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at https://about.jstor.org/terms American Economic Association is collaborating with JSTOR to digitize, preserve and extend access to Journal of Economic Literature This content downloaded from 128.252.111.81 on Fri, 04 Oct 2019 16:26:23 UTC All use subject to https://about.jstor.org/terms Journal of Economic Literature Vol. XXIII (June 1985), pp. 581-608 A Transaction Cost Approach to Families and Households By Robert A. Pollak University of Pennsylvania This research was supported in part by the National Science Founda- tion, the National Institutes of Health, and the Population Council. My intellectual debts to Oliver E. Williamson are even greater than the references to his work suggest. I am grateful to Judith Farnbach, Claudia Goldin, Vivian R. Pollak, Samuel H. Preston, and Susan Watkinsfor helpful comments and conversations during this paper's prolonged gestation. I am also grateful to Gary S. Becker, Peter Davis, Stefano Fenoaltea, Janet T. Landa, Marilyn Manser, and Ann D. Witte for helpful comments. The views expressed are my own and the usual disclaimer applies. FAMILIES ARE FASHIONABLE. Within goods, supply of labor) treating the house- the last decade, social scientists have hold as a "black box" identified only by rediscovered families and households as its preference ordering.2 The "new home fit subjects for serious analysis. Demog- economics" takes a broader view, includ- raphers and historians, anthropologists ing not only market behavior but also such and sociologists have played the major nonmarket phenomena as fertility, the ed- roles; economists, traditionally preoccu- ucation of children, and the allocation of pied with markets, have been less in- time. The major analytic tool of the new volved.' home economics is Becker's household The traditional economic theory of the production model, which depicts the household focuses exclusively on observ- household as combining the time of house- able market behavior (i.e., demand for hold members with market goods to pro- duce the outputs or "commodities" it ulti- 1 Peter Laslett (1972), Tamara K. Hareven (1977), mately desires.3 and John Demos and Sarane Spence Boocock (1978) are collections exemplifying the work outside eco- 2On the theoretical side, see Gerard Debreu nomics. Gary S. Becker's work over the last fifteen (1959) or Kenneth J. Arrow and Frank H. Hahn years, culminating in his Treatise on the Family (1971); on the empirical side, Laurits R. Christensen, (1981), is the leading example within economics. For Dale W. Jorgenson, and Lawrence J. Lau (1975) or a legal scholar's enthusiastic endorsement of the Robert A. Pollak and Terence J. Wales (1978, 1980). power of economic analysis in this area, see Richard 3The locus classicus of the household production A. Posner (1980). Victor R. Fuchs (1983), writing for literature is Becker (1965). Robert T. Michael and a less specialized audience than Becker, provides Becker (1973) provide a sympathetic restatement; an empirical analysis of "how we live" from an eco- Marc Nerlove (1974) and Zvi Griliches (1974) express nomic perspective and discusses its implications for some reservations; Pollak and Michael L. Wachter public policy. (1975) emphasize its limitations. Richard A. Easter- 581 This content downloaded from 128.252.111.81 on Fri, 04 Oct 2019 16:26:23 UTC All use subject to https://about.jstor.org/terms 582 Journal of Economic Literature, Vol. XXIII (June 1985) The new home economics ignores the contracts.5 Transaction cost analysis of internal organization and structure of vertical integration posits a situation in families and households. Although this which efficiency requires the use of physi- may surprise noneconomists who tend to cal or human capital that is specific to the believe that the internal organization and relationship between a particular supplier structure of an institution are likely to af- and a particular customer; since the value fect its behavior, economists find it natu- of such "idiosyncratic" capital depends on ral. For the economist the most economi- establishing and maintaining the supplier- cal way to exploit the fundamental insight customer relationship, the willingness of that production takes place within the either party to invest in idiosyncratic capi- household is to apply to households tech- tal depends on assuring the stability of the niques developed for studying firms. Since relationship. Firms often avoid using con- neoclassical economics identifies firms tracts to structure complex, ongoing rela- with their technologies and assumes that tionships because doing so is hazardous. firms operate efficiently and frictionlessly, Short-term contracting is hazardous be- it precludes any serious interest in the econ- cause, even when contract renewal is omizing properties of the internal struc- mutually beneficial, one party or the other ture and organization of firms. The new may have advantages that can be ex- home economics, by carrying over this ploited in bilateral negotiations over re- narrow neoclassical view from firms to newal terms; hence, short-term contracts households, thus fails to exploit fully the make it risky to accumulate capital whose insight of the household production ap- value is contingent on the relationship proach. In this essay I argue that the trans- continuing and thus discourage invest- action cost approach which recognizes the ment in such specific capital. The prob- significance of internal structure provides lems of contract renewal can be avoided a broader and more useful view of the or at least postponed by long-term con- economic activity and behavior of the tracts, but only if such contracts are "com- family. plete" in the sense that they specify the The transaction cost approach has been obligations of the parties under every pos- primarily concerned with firms and the sible contingency. Complete long-term organization of production.4 The treat- contracts are costly or impossible to write ment of vertical integration is paradig- and enforce, however, a reflection of matic. Neoclassical economics explains bounded rationality and asymmetric in- vertical integration as a response to tech- formation; and incomplete long-term con- nological inseparabilities; transaction cost tracts which fail to deal with every contin- economics explains vertical integration as gency expose the parties to the hazards a response to the difficulties of regulat- of bilateral bargaining. To avoid these con- ing ongoing relationships by means of tracting hazards firms often rely on some more complete form of integration such lin, Pollak, and Wachter (1980) discuss applications as merger. Thus, contracting difficulties- to fertility and provide references to the recent liter- the problems of negotiating, writing, mon- ature. 4Oliver E. Williamson (1975, 1979, 1981), building itoring, and enforcing agreements-are on the older institutionalist tradition, on the work central instances of transaction costs, and of Ronald H. Coase (1937), and on the "Carnegie transaction cost economics asserts that tradition" (e.g., Herbert A. Simon 1957), has been primarily responsible for developing the transaction they are significant determinants of the cost approach. Other important transaction cost pa- pers are Victor P. Goldberg (1976), and Benjamin 5 Time thus plays a crucial role in transaction cost Klein, Robert G. Crawford, and Armen A. Alchian analysis, a point emphasized by Gordon C. Winston (1978). (1982, Ch. 12). This content downloaded from 128.252.111.81 on Fri, 04 Oct 2019 16:26:23 UTC All use subject to https://about.jstor.org/terms Pollak: Transaction Cost and Families 583 organization of production. Since bureau- markets. Addressing the fundamental cratic structures have their own charac- problems of institutional choice-whether teristic disabilities, internal governance particular activities will be mediated by does not eliminate all difficulties associ- markets or carried out within families, ated with a transaction or exchange. Nev- firms, governments, or nonprofit institu- ertheless, replacing a market relationship tions-requires extending the transaction by an organization with an appropriate cost analysis from firms to families and to governance structure often safeguards the other institutional modes.6 interests of both parties. The transaction cost literature has virtu- The transaction cost approach focuses ally ignored families and households.7 The on the role of institutions in structuring complex, long-term relationships. Applied 6Henry B. Hansmann (1980) provides an excellent transaction cost analysis of nonprofit enterprise. to the firm, transaction cost economics There does not appear to be a corresponding transac- studies the boundaries, structure, and in- tion cost analysis of the state, although
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