Coase (1937) ─┬─> Williamson (1975) ─┬─> Grossman-Hart (1986) │ │ ├─> Richardson (1972) ├─> Baker-Gibbons-Murphy (2002) │ │ └─> Barnard (1938) ─────┴─> Modern Equilibrium Models # From Coase to culture? Visible Hands Build Equilibria ## Summary Gibbons proposes **retiring Coase's classic firm-versus-market dichotomy**, arguing it obscures a crucial third category: **visible hands under non-integration** (alliances, networks, ecosystems). The essay reframes organizational economics around the question: *"What can visible hands do to help a fixed set of entities collaborate?"* Building on incomplete contracts as the field's foundation, Gibbons develops a unified conception of **coalitional management** that applies both within and between organizations, culminating in the challenge of **building equilibria**—shared interpretations and relational contracts that sustain collaboration. [[x/Templates/they say i say|they say i say]], [[Space/Sources/Papers/they say i say|they say i say]] ## The Conversational Flow: "They Say / I Say" ### 🗣️ **THEY SAY** - The Received Wisdom #### Chapter 1: The Coasean Foundation Coase (1937) launched organizational economics by asking why coordination is sometimes by the price mechanism and sometimes by the entrepreneur, establishing the firm-versus-market dichotomy that has defined the field for 88 years. Following Coase, the field developed around transaction-cost economics (Williamson) and property-rights theory (Grossman-Hart), both comparing firms to markets—or more precisely, visible hands under integration to the invisible hand under non-integration. #### Chapter 2: What Others Missed But Richardson (1972) rejected the "islands" metaphor, arguing that "firms are not islands but are linked together in patterns of co-operation and affiliation," and Stinchcombe & Heimer (1985) found "hierarchical" contracts between organizations with features like authority systems and standard operating procedures. March (1962) and Cyert & March (1963) painted organizations as coalitions without shared goals, where managers spend more time managing internal coalitions than dealing with the outside world—challenging Coase's "conscious power" conception. ### 💡 **I SAY** - Gibbons' Core Moves #### Move 1: Retire the Dichotomy (YES, BUT...) Gibbons agrees Coase launched the field but proposes retiring the firm-versus-market distinction, having celebrated it for its field-launching contribution, because it was too easily taken as exhaustive when empirically it is not. > **Key Reframing**: "If contracts were perfect, would we need bosses?" replaces "If markets were perfect, would we need firms?" #### Move 2: A Three-Part Categorization (AND YET...) Non-integration is not always "the market"—there is conscious coordination outside the firm, yielding three categories: (1) visible hands under integration, (2) visible hands under non-integration, and (3) the invisible hand under non-integration. #### Move 3: Coalitional Conception (NOT X, BUT Y) Following Barnard (1938), Simon (1947), and Cyert & March (1963), Gibbons emphasizes a different conception of management than "conscious power" might imply—managers as coalition-builders rather than commanders, both within and between organizations. #### Move 4: From Equilibria to Building Equilibria (SO WHAT?) Organizations appear "systematically stupid" (Feldman & March 1981) not from malintent but from inhabiting tough environments with imperfect contracts. The challenge is understanding why some organizations get stuck in bad equilibria while others build good ones—the **clarity problem** of relational contracting. ### 🔥 **SO WHAT? WHO CARES?** - Why This Matters #### For Organizational Economics Escaping Coase's classic distinction motivates two agendas: (1) redoubling research on organized non-integration, and (2) a coalitional reconception of management that applies both within and between organizations, likely requiring new thinking about how parties build equilibria. #### For Understanding Modern Economy The visible hand operates across a vast range of activities—from firms to alliances, cooperatives, consortia, networks, platforms, and ecosystems—far beyond what Chandler (1977) documented or Simon (1991) implied. #### For Practitioners The practical question becomes: What can visible hands do to help a fixed set of entities collaborate? And its cousin: What can economists do to help visible hands do their job? ## Critical Insights > **Why this matters**: Gibbons is not just updating Coase—he's fundamentally reorienting organizational economics from explaining **where boundaries are** to understanding **how collaboration is built**. This shift is essential for analyzing 21st-century organizational forms that don't fit the firm-market binary. ### Four Revolutionary Implications #### 1. **The Dichotomy That Matters** Locating the foundation of organizational economics in Coase's incomplete formal contracts results in the **visible-hands dichotomy** being more important than the integration dichotomy. **Shift**: From "integrate or outsource?" to "how do visible hands coordinate when contracts are incomplete?" #### 2. **Informal Activities as Equilibria** Because contracts are incomplete, opportunities for discretion produce informal aspects within and between organizations. Many informal activities can be understood as equilibria of repeated games—"relational contracts" that are promises you can believe in. **Mechanism**: Future rents sustain cooperation, but parties face both credibility problems ("Should I believe your promise?") and clarity problems ("Do we share understanding of your promise?") #### 3. **Culture and Equilibrium as Parallel Phenomena** Organizational culture (Schein) and equilibrium (Kreps) share remarkable parallels: both concern shared understandings, both face clarity problems, both involve constitutive foundations (Geertz) that shape how parties interpret their world. **Analogy**: Just as culture is "public because meaning is" (Geertz), equilibria may not be public without substantial work to build shared interpretations. #### 4. **Building Requires Naming and Framing** Building equilibria may require (a) naming—expressing what "we know more than we can tell" (Polanyi) through stories, contradictions, and figurative language; and (b) framing—changing how parties categorize and interpret their continuous world into shared situations. **Challenge**: Small differences in categorization can produce large differences in achievable equilibria (GLW 2021), making re-framing slow, risky, and path-dependent. ## Theoretical Framework ### The Clarity Problem **Definition**: Beyond the credibility problem of relational contracting ("Should I believe you?"), parties face the clarity problem: **"Do we have a shared understanding of what you're promising?"** **Example from Blader et al. (2020)**: When a firm implementing Lean Management (emphasizing teamwork and empowerment) shared performance distributions by name, sites that had begun LM performed **worse** than controls—possibly because workers interpreted this as management reneging on or misunderstanding the promise of teamwork. ### Two Approaches to Building Clarity #### Naming (Section 6.2) When parties "know more than they can tell" (Polanyi), they may use contradictions (Sloan's "decentralization with coordinated control"), stories, and figurative language to inspire "leaps in understanding." But this introduces fuzzy boundaries—clear prototypes don't guarantee clear categorizations. **Evidence**: - Weber & Camerer (2003): Path-dependence as dyads build shared language - Gibbons et al. (2023): Principles (broad application) more effective than rules (specific) for building adaptable equilibria #### Framing (Section 6.3) Parties distill continuous state spaces into finite categories through cognitive frames. GLW (2021) showed that parties play the best equilibrium they can see given their categorization, and small categorization differences produce large equilibrium differences. **Practical examples**: - Turco (2016): Firms building wiki culture must clarify whether voice rights imply decision rights - Frydlinger et al. (2019): "Formal relational contracts" require substantial pre-signing work on shared understanding plus ongoing processes for joint response to unanticipated events ## Connections ### Builds On #### The Coasean Tradition - **[[📜coase37_nature]]** - Transaction costs and incomplete contracts as field foundation - **[[📜williamson79_tce]]** - "Substantially the same factors" cause challenges in both integration and non-integration - **[[📜gh86_ownership]]** - Property rights theory: ownership as residual control rights #### The Relational Contracts Literature - **[[📜bgm02_relational]]** - Formal and relational contracts interact; integration decision made to serve relationship - **Baker et al. (2023)** - From incentives to control to adaptation: formal-relational interaction - **Levin (2003)** - Relational contracts can enforce actions formal contracts cannot #### The Behavioral/Political View - **Barnard (1938)**, **Simon (1947)**, **Cyert & March (1963)** - Management as coalition-building, not command - **March (1962)** - Business firm as political coalition; decision-making involves unresolved conflict - **Feldman & March (1981)** - Organizations appear "systematically stupid" but may be optimal responses to tough environments ### Extends To #### Empirical Organizational Economics - Since 2019 in top-5 journals: ~150 papers in development, environmental, health, IO, labor/personnel, political economy, public, and trade analyzing organizational issues—"accidental empirical organizational economics." #### Culture and Cognition - **Schein (1985)** - Organizational culture as "pattern of basic assumptions" invented/developed by groups - **Kreps (1990)** - Culture as equilibrium; unforeseen contingencies create path-dependence - **Geertz (1973)** - "Culture is public because meaning is"—intersubjective, not distributional #### Building Mechanisms - **Bidner & Francois (2013)**, **Acemoglu & Jackson (2015)** - Leaders shape norms - **Li & Van den Steen (2021)** - How norms develop within equilibria - **GLW (2021)** - Cognitive frames determine which equilibria are visible/achievable ### Applications #### Module 1: Pay for Performance 🐢 **Question**: How to incentivize when multiple tasks and imperfect measurement? **Connection**: Holmstrom-Milgrom multitasking as clarity problem—what counts as "good performance" across dimensions? #### Module 2: Managers & Productivity 🐙 **Question**: Why do management practices vary so much? **Connection**: Bloom et al. RCT shows practices matter, but adoption is slow—clarity problem in building shared understanding of "good management" #### Module 3: Delegation & Communication 👾 **Question**: When to delegate authority? **Connection**: Aghion-Tirole formal vs. real authority—information shapes equilibrium authority regardless of formal assignment #### Module 4: Boundary of the Firm 🐅 **Question**: When to integrate? **Connection**: GH property rights + BGM relational contracts unified—integration decision serves relationship, not just ownership #### Module 5: Governance of Non-Integration 🐢 **Question**: How do firms collaborate without integration? **Connection**: MM Kenya roses shows relationship value; Gibbons extends to building/maintaining such relationships #### Module 6: Capabilities & Culture 👾 **Question**: Where do organizational capabilities come from? **Connection**: BHS state effectiveness shows individual-organization interaction; Gibbons reframes as equilibrium-building challenge ## Classic Examples Reinterpreted ### HP-Canon (35-year alliance) Laser printer-engine relationship required adaptation to uncertainty not contractible. Trading with each other rather than auction market = visible hands under non-integration rather than invisible hand. **Gibbons' Point**: Not just "make vs. buy" but "make vs. ally"—different equilibrium-building challenges. ### ABB's "Global and Local" Barnevik: "global and local, big and small, radically decentralized with central control"—contradictions convey tacit knowledge by inspiring "leaps in understanding." **Gibbons' Point**: Naming problem—using contradiction to build shared interpretation when direct specification impossible. ### Blader et al. Transportation Company Lean Management sites shared performance by name → performed worse—possibly broke the equilibrium by creating credibility/clarity issues about "teamwork and empowerment" promise. **Gibbons' Point**: Even well-intentioned interventions can break equilibria if parties don't share interpretation of what's promised. ## Methodological Insights ### The "Coase Meets Heckman" Perspective Organizations perform poorly on average not because they're "stupid" but because they "systematically" inhabit tough environments (incomplete contracts). Sample selection: we observe bosses where contracts are imperfect—making ALL governance structures perform imperfectly. ### Persistent Performance Differences (PPDs) Three-part argument: (1) PPDs exist among similar enterprises; (2) management practices correlate with these differences; (3) many practices rely on relational contracts. Why don't laggards catch up? Because high-performance equilibria are hard to build. **Four Broad Reasons** (borrowing from Jan Rivkin): 1. **Perception**: Don't know they're behind 2. **Inspiration**: Know they're behind but don't know what to do 3. **Motivation**: Know what to do but insufficient incentive 4. **Administration**: Trying hard but can't get organization to execute—**the clarity problem** ### The Arc of Research (Figure 2) Three branchings: (1) organizational vs. societal culture; (2) equilibrium vs. other aspects of culture; (3) constitutive foundations vs. regulative consequences. Then: evolve vs. build, and if build, then name vs. frame. ## Discussion Notes From **14.282 Organizational Economics**: **The Central Question Evolved**: - **Coase 1937**: "Why coordination by price mechanism in one case, entrepreneur in another?" - **Gibbons 2025**: "What can visible hands do to help entities collaborate?" **Why This Reframing Matters**: 1. **Empirically**: Makes visible the third category (organized non-integration) that firm-market dichotomy obscured 2. **Theoretically**: Shifts focus from **ex ante governance choice** to **ongoing equilibrium maintenance** 3. **Practically**: Addresses 21st-century forms (platforms, ecosystems) that don't fit binary categorization **The Deeper Challenge**: - **Credibility problem**: Can solve with repeated-game logic (future rents sustain cooperation) - **Clarity problem**: Harder—requires building shared interpretations in high-dimensional, uncertain environments - **Culture literature** offers insights: naming (Polanyi), framing (Geertz, Goffman), categorization (DiMaggio) ## Questions for Further Research ### Theoretical 1. **How to model clarity problem formally?** Current relational contract models assume shared understanding 2. **What determines speed of equilibrium-building?** Why are some organizations/alliances faster learners? 3. **Can we formalize "naming" and "framing"?** GLW (2021) start on framing—what about naming? ### Empirical 4. **How to measure relational contract strength?** Beyond observing relationship duration/intensity 5. **What interventions help build clarity?** RCTs on principles vs. rules (Gibbons et al. 2023) are start 6. **Do culture interventions help build better equilibria?** Natural experiments like Blader et al. but more variation ### Practical 7. **Can we design "clarity-building" processes?** Frydlinger et al. (2019) offer tools—do they work? 8. **What role for third parties?** Consultants, facilitators, platforms—do they help or hurt? 9. **How to repair broken equilibria?** Blader et al. disrupted one—what would restoration look like? ## Connection to Research Agendas ### For Bayesian Entrepreneurship - **Question**: How do entrepreneurs build shared beliefs with investors, team, customers? - **Gibbons' Lens**: Entrepreneurship as **building new equilibria** under maximal uncertainty - **Application**: Naming and framing challenges acute when no established categories exist ### For Operations Management - **Question**: How do supply chain partners coordinate complex, evolving requirements? - **Gibbons' Lens**: Not just **formal contracts** but **relational equilibria** built through iteration - **Application**: Helper & Munasib (2022) show sourcing strategy as firm-level attribute—equilibrium view ### For Organizational Cognition - **Question**: How do organizations build collective intelligence? - **Gibbons' Lens**: Shared interpretations as **constitutive foundation** for coordination - **Application**: Categorization experiments (Chiu, Nisbett) inform how frames enable/constrain equilibria ## Empirical Predictions If Gibbons is right, we should observe: 1. **Naming**: Organizations with richer "storytelling" (metaphors, contradictions) adapt better to novel situations 2. **Framing**: Small changes in how situations are categorized produce large performance differences 3. **Principles vs. Rules**: Organizations using broad principles (vs. specific rules) build more robust equilibria 4. **Path-dependence**: Early happenstance in relationships creates persistent equilibrium differences 5. **Clarity Investment**: Time spent on shared understanding predicts relationship performance (controlling for resources) ## Personal Reflection (Gibbons' Voice) Gibbons is "obsessed with visible hands—so much so that I essentially never think about markets." He's absorbed by: "What can visible hands do to help a fixed set of entities collaborate?" and "What can economists do to help visible hands do their job?" **The Journey**: Gibbons' path was "not standard"—excited by Wilson on bureaucracy AND Arrow on information economics, developed deep roots in March before considering Williamson seriously. **The Revelation**: After recent revisitings for the textbook with Barron and Powell, proposes updating one-sentence rendition from "If markets were perfect, would we need firms?" to "If contracts were perfect, would we need bosses?" **The Hope**: Gibbons is "convinced that this step [building shared interpretations] is crucial if the parties are to build an equilibrium, and I expect that learning more about how culture can be built will help parties and economists learn how to build equilibria. I look forward to the results." --- *"From Coase to visible hands, equilibria, culture, and build"* - Gibbons (2025) *"The visible hand doesn't just replace the invisible hand—sometimes they shake hands"* - Baker, Gibbons, Murphy (2002) *"Culture is public because meaning is"* - Geertz (1973), as interpreted by Gibbons --- # Original Notes (기존 정보 유지) [[coase to culture x strategic ambiguity]] angie's pick from below gpt's 1. Coasian sense of coordination and conscious power; "entrepreneur" is a historically anchored proxy for intentional coordination, not necessarily for individualistic risk-bearing. 2. Coase (1937) contrasted the "price mechanism" (market coordination) with "the entrepreneur-coordinator" (hierarchical coordination inside firms). 3. Coase's foundational language to reinterpret what "visible hands" mean in modern organizational economics that embodies 4. extends Coase's "conscious power of the entrepreneur" to interorganizational governance (alliances, ecosystems, polycentric networks). 5. hybrid arrangements require theories of collaborative equilibrium-building rather than binary governance choice. ---- > [!NOTE] [Chat-GPT](https://chatgpt.com/share/68f374e0-c8a8-8002-b96b-4c65036b58c0) > ### **1. Why Gibbons Uses "Entrepreneur"** >Gibbons invokes the **entrepreneur** not in the Schumpeterian sense (innovation, risk-taking), but in the **Coasian sense of coordination and conscious power**. Coase (1937) contrasted the _"price mechanism"_ (market coordination) with _"the entrepreneur-coordinator"_ (hierarchical coordination inside firms). Gibbons revisits this figure because it embodies the **visible hand**—the deliberate, organizing counterpart to the invisible hand of the market. By using "entrepreneur," Gibbons connects back to Coase's foundational language to reinterpret what "visible hands" mean in modern organizational economics. However, instead of celebrating the entrepreneur's _authority_, Gibbons reframes it as **coalitional management**—leadership through coordination among interdependent actors both within and between organizations. He thereby extends Coase's "conscious power of the entrepreneur" to **interorganizational governance** (alliances, ecosystems, polycentric networks). → So, "entrepreneur" is a historically anchored proxy for _intentional coordination_, not necessarily for individualistic risk-bearing. > ### **2. Summaries of Main Argument** > #### **2.1 What–Why–How–So What > | Stage | Summary | | ----------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | | **🐢What** | Gibbons proposes to retire Coase's firm–market dichotomy and replace it with a richer framework distinguishing **visible-hand coordination** (intentional, organized) and **invisible-hand coordination** (spontaneous, price-based), whether within or across organizations. | | **🐅Why** | Because Coase's framing (firm vs. market) obscures the many forms of **organized non-integration** (alliances, networks, ecosystems). These hybrid arrangements require theories of **collaborative equilibrium-building** rather than binary governance choice. | | **🐙How** | By reframing Coase's "entrepreneurial coordination" as **coalitional management**, extending conscious coordination to inter-organizational settings. Gibbons draws on Barnard, Simon, and Cyert–March to reconceptualize management as coalition-building rather than command. | | **👾So What** | This redefinition opens a new research agenda: how visible hands _build equilibria_—that is, how managers, entrepreneurs, or collective actors intentionally construct shared understandings and relational contracts (culture, norms, expectations) that sustain collaboration. It shifts the field from explaining organizational boundaries to modeling **institutional creation and cultural equilibrium.** | > #### **2.2 Interesting – Important – Valid > |Criterion|Gibbons' Contribution| |---|---| |**Interesting**|He challenges the canonical boundary problem—retiring the firm–market dichotomy itself. Instead of asking _where_ firms stop and markets start, he asks _how visible hands build collaboration_. This inversion is conceptually provocative and breaks with decades of orthodoxy.| |**Important**|The argument redirects organizational economics toward studying _how equilibria are built_, not merely how they exist. This matters for understanding ecosystems, digital platforms, and inter-organizational culture—core structures in the 21st-century economy.| |**Valid**|The argument builds logically from Coase's own insights on incomplete contracts and "conscious power." Gibbons grounds his reinterpretation in the transaction-cost and relational-contracting literatures, while extending them with sociological and cultural theory (Barnard, Simon, Schein, Kreps). It thus stands on strong theoretical foundations while updating them for contemporary coordination challenges.| > ### **3. Linking Argument to Entrepreneurial Characteristics** > | Gibbons' Argument | Entrepreneurial Characteristic | Theoretical Bridge | | ----------------------------------------------------------- | ------------------------------------------------------------------------------------------------------ | --------------------------------------------------------------------------------------------------------------------------------------------------------------- | | **Visible-hand coordination replaces the invisible hand.** | Entrepreneurs act under uncertainty and coordinate across incomplete contracts. | Entrepreneurial judgment (Knightian) and Coasian authority as adaptive coordination mechanisms. | | **Coalitional conception of management replaces command.** | Entrepreneurs mobilize and maintain coalitions of stakeholders (investors, partners, employees). | This reframes "entrepreneurial power" as _relational equilibrium-building_, aligning with behavioral and institutional entrepreneurship. | | **Building equilibria and cultures as intentional action.** | Entrepreneurs create new shared meanings, norms, and expectations—essentially building new equilibria. | Entrepreneurial process as _constitutive institutional design_: visible hands shaping new coordination logics. | | **Retiring firm vs. market dichotomy.** | Entrepreneurs operate in hybrid zones—platforms, networks, ecosystems. | Entrepreneurship as _governance innovation_ rather than organizational choice, connecting to Ostrom and Richardson's "conscious coordination outside the firm." | > **Synthesis:** Gibbons' "visible-hand equilibrium building" redefines entrepreneurship as the _collective construction of coordination institutions_ under uncertainty. The entrepreneur is thus not just a price-taker or leader within the firm but an architect of collaborative equilibria—someone who designs and maintains _the social fabric of coordination_ among actors whose relationships cannot be fully specified ex ante.