The Organization of Production: Evidence from the Aerospace Industry

THE interface between successive stages of production is frequently governed by contractual agreements, and the efficiency of such arrangements has been the subject of considerable attention in the economic literature. But production is organized administratively within firms as well as contractually between them, and given the practical limitations of bureaucratic organization, the relevant question can be seen to be not merely whether contractual deficiencies exist but how severe such deficiencies may be relative to the alternative costs of organizing production internally. The important issue from an institutional choice perspective thus becomes how the particular details of a transaction affect the differential efficiency of alternative organizational forms. Recent theoretical work has sought to identify such relationships.' In particular, the choice between internal and external organization and, in the event of the latter, the choice of contract terms have been related to several critical parameters of the transaction. This paper presents some