Evolution : Understanding the Institutional Structure of Production

Analyzing the “institutional structure of production” as proposed by Coase requires a dynamic analysis of the business system. We focus on the evolution of vertical scope, and propose a framework where capability differences interact with changing transaction costs. Such aggregate forces shape the choice context of individual firms. Specifically, disintegration tends to happen when firms differ in relative competence along the value chain, creating latent gains from trade that then motivate efforts to reduce transaction costs. Changes in scope, in turn, shape the process of capability formation and productivity improvement. These insights are partly formalized in an extension of Fisher’s Selection Theorem.