MUHAMMAD

OSAMA
150042

Governance and
Institutions
BY
Oliver Williamson and
Elinor Ostrom

Oliver Williamson

INTRODUCTION
Born on September 27, 1932(age83) at
Superior, Wisconsin.
B.S.in management from theMIT Sloan
School of Managementin 1955.
MBAfromStanford Universityin 1960.
Ph.D.fromCarnegie Mellon Universityin
1963.
From 1965 to 1983 he was a professor at
theUniversity of Pennsylvania.
From 1983 to 1988, Professor ofEconomics of
Lawand Organization atYale University.

 Professorships

in business
administration, economics, and law at
theUniversity of California, Berkeley.
Since 1988 Professor at theHaas School
of Business.
In 1999 he taught Economics at
theUniversity of Siena.
In 2009, he was awarded theNobel
Memorial Prize in Economicsfor "his
analysis of economic governance,
especially the boundaries of the firm

Elinor Ostrom

INTRODUCTION
Born

on August 7, 1933 at Los Angeles,

California, United States.
B.A. and Ph.D. fromUCLA.
Ostrom lived inBloomington,Indiana, and
served on the faculty of bothIndiana
university and Arizona State University.
Rank of distinguished professor at Indiana
University.
Co-director of the Workshop in Political
Theory and Policy Analysis at Indiana
University.

 She

was a lead researcher for the

Sustainable Agriculture and Natural
Resource Management.
Died on June 12, 2012(aged78) at
Bloomington, Indiana, United States.

INTRODUCTION
Williamson

and Ostrom both advanced new

theories of economic governance, but from
very different perspectives.
The economic problem Ostrom and
Williamson address is resource governance.
Williamson offers a top-down contracts-based
solution to the incentive problems of
opportunism in corporate governance.
Ostrom offers a bottom-up communicationbased solution to the governance
opportunities of community resources.

 Williamson

focuses on firms as
contractually-based institutional solutions
to this problem.
Ostrom focuses on emergent community
norms as institutional solutions.

OLIVER WILLIAMSON
Economic Strategies To limit guileful behavior
Williamsons

work focuses on the set of

contractual arrangements through which
economic activities are organized
His work covers contractual relationships
between firms, bureaucracies and
independent agents that result from doing
deals in markets, and relationships inside
organizations that are shaped not merely
by the contractual terms under which
employees join them but also by
hierarchical reporting arrangements.

 The

essence of Williamsons theory of the

conditions under which market failure is likely
to be anticipated and lead to
internalization involves the simultaneous
presence of four conditions,
Bounded rationality.
Opportunism.
Small numbers of alternative trading
partners.
Asset specificity.
The logic linking them together is as follows.

In a world of bounded rationality, transactions

can become problematic if disputes arise
about what the state of the world actually is
or whether what was promised for delivery is
actually being delivered.
In the real world, however, contracts will
tend to be incomplete because transactors
fail to anticipate eventualities and attempt
to avoid incurring the costs of trying to think
of eventualities and negotiate over them.
Bounded rationality would not be a problem
for the working of contractual relationships if
trading partners could be relied upon not to
act with opportunism in the presence of
information impactedness

 In

the absence of opportunism, gaps in contracts

would be dealt with in good faith with both sides
trying to ensure that they agreed something that
was fair and reasonable rather than trying to
maximize their own returns.
Williamson makes no claim that all economic
actors are prone to behave with opportunism;
rather his argument is essentially that
opportunists used information advantages as a
cover for self-serving behavior.
One general deterrent to would-be opportunists is
the ability of the other transactor to switch to
alternative trading partners in the event that
opportunistic behavior is detected, hence
Williamsons small numbers condition for market
failure being expected.

 Williamson

came to realize that a transactor

who was dealing with a monopolistic supplier
would have no reason to worry about falling
foul of the trading partners opportunistic
tendencies if they could easily redeploy their
assets to the production of other outputs.
Aside from the possibility of a general lack of
demand for output due to recession, it is
asset specificity that is the key
determinant of business risks.
Where a transactor is concerned that all four
conditions are present, a potential trading
partner may be able to create a situation in
which it would not be in their interest to
behave with opportunism.

ELINOR OSTROM
The opportunity of commons
Ostrom's early work emphasized the role of public
choice on decisions influencing the production of
public goods and services. Among her better known
works in this area is her study on the polycentricity
of police functions in theGreater St. Louisareas.
Her later, and more famous, work focused on how
humans interact with ecosystems to maintain longterm sustainable resource yields. Common pool
resources include many forests, fisheries, oil fields,
grazing lands, and irrigation systems.
She conducted her field studies on the
management of pasture by locals inAfricaand
irrigation systems management in villages of
westernNepal(e.g., Dang).

 Her

work has considered how societies have

developed diverseinstitutional
arrangementsformanaging natural
resourcesand avoiding ecosystem collapse
in many cases, even though some
arrangements have failed to prevent
resource exhaustion.
Her work emphasized the multifaceted
nature of humanecosystem interaction and
argues against any singular solution" for
individual social-ecological system problems

Design principles for Common

Pool Resource (CPR) institution
1)

2)

3)

4)

Clearly defined boundaries (clear definition

of the contents of the common pool
resource and effective exclusion of external
un-entitled parties).
Rules regarding the appropriation and
provision of common resources that are
adapted to local conditions.
Collective-choice arrangements that allow
most resource appropriators to participate in
the decision-making process;
Effective monitoring by monitors who are
part of or accountable to the appropriators.

5) Mechanisms of conflict resolution that are cheap

and of easy access.
6) A scale of graduated sanctions for resource
appropriators who violate community rules.
7) Self-determination of the community recognized
by higher-level authorities; and
8) In the case of larger common-pool resources,
organization in the form of multiple layers of nested
enterprises, with small local CPRs at the base level.
These principles have since been slightly modified
and expanded to include a number of additional
variables believed to affect the success ofselforganized governance systems, including effective
communication,internal trustandreciprocity, and
the nature of the resource system as a whole.

CONCLUSION
The

2009 Nobel Prize to Oliver

Williamson and Elinor Ostrom was a
governance and institutions prize. They
both showed why institutions of
governance matter to the building blocks
of economic organization.
Williamson with firms as organizations;
Ostrom with institutions as organization.
Both works in ways that break the standard
rules of how to be an economist.
Williamson says governance is a problem
because people are self-interested.

 Ostrom

says that governance is a solution

because self-interest can be coordinated
when appropriately focused.
For Williamson most people are good, but
some are self-serving and will go
unpunished unless institutions are designed
about this latter groups governance.
Ostrom however believes that trust plays a
major role in how common pool resource
problems are handled.
Williamson is reluctant to consider people as
having natural tendency to trust in his view
trust is credibility of commitments that
trading partners are prepared to make.

 At

the level of the firm, The key thing the

leader needs to do is help the workers to
see that the best way to serve their own
and firms interests in the long run. The
leader cannot force subordinates to buy into
this idea, but a consensus may emerge that
the leaders directions should be
followed rather than ignored.
At the level of the market, Markets that are
overly easy to enter will not be healthy in
the long run, for an overpopulation of
suppliers will have trouble making normal
profits. Such difficulties will promote
opportunistic behavior.

 Richardson

saw communication and

cooperation as means by which customers
and suppliers can engage in mutually
beneficial transactions in the long term.
The division of labor between firms is seen
as being due to differences in capabilities
and that occurs to reduce Coordination
problems between activities.

 Williamson

is well aware of Richardsons

contributions, he even provides an
endorsement on the dust jacket of the
second edition of Richardsons 1960 book,
calling it an early and important
contribution.
Nobel committee might therefore have been
to award the 2009 Nobel Prize on economic
governance and the institutions that
underpin it to Elinor Ostrom, Oliver
Williamson and George Richardson, with
significant contributions of Geoffrey
Hodgson, Brian Loasby, and Deirdre
McCloskey.

REFRENCE
Oliver Williamson and Elinor Ostrom. (124). Governance and Institutions. Peter E.
Earl & Jason Potts, 2009.