Ira Altman
Graduate Research Assistant
Community Policy Analysis Center
Department of Agricultural Economics
University of Missouri-Columbia
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• Background
• Theory
• Empirical Literature
• Application
• Conclusion
Overview
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Background
• 2 power plants considering the use of agricultural products in Missouri
• CPAC current project
• Complementary project
• Working research question: How can a biomass exchange be most efficiently organized?
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Theory
• Leading organizational economics theory
– Williamson’s transaction cost economics
• Designed to compare the costs and benefits of competing organizational forms
• The theory is still developing
• Application to biomass exchange may test the theory on an emerging industry and lead to efficient organization of the biopower industry
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Theory
• Working hypothesis: transactions are aligned with organizational form in a transaction cost minimizing way
• Transaction attributes imply varying levels of transaction costs depending on the organizational form chosen
• Decisions makers will choose the least cost method of exchange
• Key attributes of the transaction are: asset specificity, uncertainty and frequency
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Theory
• Asset specificity creates bilateral dependency and opens players up to opportunism
• Asset specificity– durable assets that have a significantly lower value in alternative uses by alternative users
• Types of asset specificity include physical, spatial, dedicated assets, human asset specificity, and temporal asset specificity
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Theory
• Organizational forms include spot markets, hybrids such as the use of contracts, and internal organization (vertical integration)
• Two key predictions:
1. If asset specificity is low: a market organizational form is least cost
2. If asset specificity is high: an internal organizational form is least cost
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$ M(k)
X(k)
H(k) k
1 k
2
Asset Specificity k
Organizational Costs as a Function of Asset Specificity
Source: Adapted from Williamson, 1991
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Empirical Literature
• Types: – qualitative case studies
– quantitative case studies
– cross sectional and panel regressions
• Focus: – contract level
– governance level
– institutional level
• The choice of organizational form is modeled as some function of asset specificity and other explanatory variables
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Empirical Literature
• Dependent variables:
– internal versus market exchange (the governance level)
– price and length of contract or other contract provisions (the contract level)
– policy choice as an institutional variable (the institutional environment level)
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Empirical Literature
• Common independent variables include some measure of asset specificity and uncertainty
• Measures for asset specificity:
– characteristics of the technology
– number of buyers and sellers
– closeness of buyers and sellers
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Empirical Literature
• Supportive of the theory– asset specificity variables statistically significant
• Addressing data problems did not change the support of the data for the theory
• Several studies on natural resource industries such as coal, natural gas and oil
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Application
• Mail survey of 200 biopower plants – contact information from the Energy Information
Administration
• Important information from the survey:
– Biomass exchange type (external, internal or both)
– Asset specificity including: physical asset specificity, spatial asset specificity
– Other potential explanatory variables
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Application
• Physical asset specificity measured by the flexibility of the technology
– high biomass flexibility and fossil fuel flexibility would imply low levels of asset specificity
• Spatial specificity measured by average hauling distances to the power plant
– low hauling distances or adjacency may indicate high spatial specificity
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Application
• Data are moderately supportive of the theory
Biomass Procurement Type and Technology Flexibility
Procurement Type Inflexible
Internal 67%
Fossil Fuel Flexibility
Moderate
22%
Flexible
30%
External
Both
14%
19%
44%
33%
40%
30%
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Application
Biomass Procurement Type and Average Hauling Distances
Average Hauling Distances
Procurement Type 10 miles or less 10 – 50 miles Over 50miles
Internal 78% 44% 27%
External
Both
0%
22%
31%
25%
45%
27%
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Application
• Other variables less supportive
• What explains why the data may not support the theory?
– Survey design
– Small sample size
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Application
– Missing important variables– other organizational theories may be required to advise the industry
– Inefficient firms – empirical assumption that observed organizational forms are efficient
– may be an inappropriate assumption because industry immaturity
– a dynamic approach may be necessary
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Conclusion
• Use spot markets or short term contracts if:
– Flexible technology
– Many possible fuel types
– High hauling distances
– Many suppliers
(low asset specificity)
• Use long term contracting or internal organization under the opposite conditions
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Conclusion
• Future research
– update the survey results and use more empirical methods to understand the data
– apply the theory to logistical questions: who should complete storage and processing of biomass?
– apply the theory to contracting questions: what type of contracts should be used? What type of vertical integration should occur?
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