Opportunism and Long-Term Contracting: Transactions in Broken Hill Zinc Concentrates in the 1930s

The essay examines the design and operation of a long-term contract at the centre of the Anglo-Australian zinc industry during the 1930s. All the parties to this contract invested in durable assets that were highly specific to transactions in Broken Hill zinc concentrates. Under such conditions, according to transaction cost economics, an efficient contractual response would entail the vertical integration of exchange or, at the very least, some long-term arrangement under which the parties make sizeable credible commitments in support of exchange. The basis of the transaction cost argument is that such an arrangement is necessary to protect the parties against the risk of opportunistic behaviour by exchange partners. The contract examined here, however, did not possess such protective devices, yet, by all accounts, performed extremely well in the most testing of circumstances. Close analysis of the design and operation of this contract gives reason to question the generality of the transaction cost assumption that parties structure their institutional arrangements with a view to protect themselves against the hazards of opportunism. The parties to this contract did not anticipate a high degree of opportunism and this was reflected in the design of their contract. From the analysis of the way the contract actually operated it is clear that this expectation was more than justified and exchange in Broken Hill zinc concentrates was characterised by close co-operation and forbearance rather than opportunism.