Complexity, Flexibility, and the Make-or-Buy Decision

Sixty-five years ago, Ronald Coase (1937) asked what determines whether production will be organized in a firm or through the market, later coined the "make-or-buy" decision. This question was put center stage by Oliver Williamson (1975, 1985) who further developed transaction-costs economics (TCE), arguing that incomplete contracts and specific relationships overshadowed by opportunism, asymmetric information, and bounded rationality will lead vertical processes to integrate. Benjamin Klein et al. (1978) enhanced TCE with the "hold-up" problem: in the face of incomplete contracts, specificity, and opportunistic behavior, integration can help promote ex ante investment incentives.