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SummaryThis paper provides a mathematically coherent and concise formulation of the Williamson market‐failure approach and, hence, develops models for single‐level and multilevel firms and organizations. These models optimally determine the extent of integration for each viable link on every hierarchical level, When the models are reformulated in terms of four operational parameters that determine integration, applied benefit‐cost methods can be utilized, in practice, to model a firm. Both static and dynamiclmodels‐are presented.

Within an analytical context that assesses both the benefits & the costs of social interaction, a general theory of interpersonal exchange is developed from a public-goods, public-choice point of view. Social transaction benefits & costs are specified as a composite function of interpersonal bindingness, which itself depends on five parameters: propinquity, average length of encounter, encounter content, number of issues the relationship transgresses, & degree of interactive decision making. The model provides for the determination of an optimal personal degree of bindingness in a two-person relationship. Extensions encompass the more interesting reaction case, where two individuals each select their own optimal personal bindingness levels. 6 Figures. Modified HA.

It is the purpose of this article to extend and to clarify the public goods approach to the study of alliances. In particular, the paper examines the nature of defense as a pure public good and draws the conclusion that some defense expenditure may be best classified as an impure public good due to the presence of divisibility and exclusion properties. The traditional pure public good model of alliances is analyzed in a more general framework in order to introduce more fully resource scarcity and to demonstrate the symbiotic properties of the military alliance. Two models of increasing generality recast the analysis so that defense is an impure public good. Both optimal membership size and production efficiency are studied in the impure public good model. The paper concludes with a rationale for world peace organizations based on the economic theory of clubs.