Just to give you a background on economic governance, which is the body of work for which Professors Ostrom and Williamson are awarded the Nobel prize of economics, the following are taken from the fast readdocument that can be accessed from the Nobelprize.org website, written by its Editor-in-Chief, Adam Smith (cool name):
"The 2009 Sveriges Riksbank Prize for Economic Sciences is concerned with the basic question of where best to conduct transactions; in the open market, within firms, or among self-regulating groups of individuals."
For Professor Ostrom, it is self-regulating groups of individuals on the subject of the infamous common good:
"Elinor Ostrom has made extensive studies of the management of common property by groups of common owners, contrasting that with management by state or private institutions. Perhaps surprisingly, she has found that those with a vested interest in the resources they manage are frequently better at regulating those resources than publicly-appointed management bodies would be. Her research reveals that in many, but not all, cases, allowing users to develop their own rules to regulate the use of common property results in the most efficient solution for managing those resources... In short, self-governance can be successful."
User participation in governing public projects is not a new thing. Lately, it has been one of the blueprints of developing agencies when they lend money to governments to fund public projects (I should know--I came from the Asian Development Bank). And this is because they want end-users to get a great sense of ownership on these projects. But what sets Professor Ostrom's work apart is that for her, there is more participation for the end-users:
"[Ostrom's] principles are in stark contrast to the common view that monitoring and sanctioning are the responsibility of the state and should be conducted by public employees."
It is quite unusual that Prof. Ostrom won the Nobel Prize in Economics, and it is not just because she's the first woman to be awarded the prize. It is also because she's really not an economist; she's a political scientist. And that could probably be the reason why her huge contribution is really not theoretic, but empirical:
"Her work incorporates both case studies of numerous real-life examples and laboratory experiments testing the ways people interact. The experiments reveal that people seem more willing to regulate others' behaviour than predicted, and also that the development of efficient rules for regulation depends critically on good communication between the people involved."
If you want the theory, we now turn to the other winner, Professor Williamson. For him, some transactions are better conducted within firms:
"Oliver Williamson's work deals with understanding the limits of the firm. He has extended the theories of why certain transactions can be accomplished more efficiently within firms than they would by competition between firms or individuals."
The first way to understand Williamson's contribution is to think that transactions may not be efficient in the market:
"[N]egotiations have to continue until both parties agree, haggling costs can be substantial, and there is no guarantee that the final agreement will be either immediate or efficient."
Williamson argued that firms can be s oltion as they provide a cheaper way to resolve conflicts:
"[H]is theories predict that hierarchical organizations are better places to conduct transactions, such as the sale of coal for power plants, wherever there is either significant complexity or mutual interdependence underlying the transaction. The results of his analysis have significant implications for public policy, including the regulation of competition, since what at first sight might seem an apparently imperfect market may in fact be the most efficient way of regulating a particular set of transactions."
But this does not also suggest that all transactions should be done within a firm; they're also not perfect: executive authority of firms can also be abused. Also, some recent trends point out that transactions are better handled outside the firm: outsourcing is one perfect example:
"Williamson's theories extend previous work on the limits of the firm's efficiency, by Ronald Coase among others, to a level at which empirical testing of predictions becomes possible."
Nevertheless, Williamson categorized when are firms appropriate--it is when transactions are complex or non-standard, parties are mutually dependent, and assets are relationship-specific. But Williamson warns that if government tries to come in and regulate in this case, policies should be careful not to limit the size of corporations.
In conclusion, Williamson's message is simple and clear:
"Large private corporations exist primarily because they are efficient. They are established because they make owners, workers, suppliers, and customers better off than they would be under alternatie institutional arrangements. When corporations fail to deliver efficiency gains, their existence will be called in question."