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Summary of the article ‘Transaction Cost Economics as a Theory of the Firm, Management, and Governance’
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Summary of the article ‘Transaction Cost Economics as a Theory of the Firm, Management, and Governance’
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Transaction Cost EconomicsSamenvatting ‘Transaction Cost Economics as a Theory of the Firm,
Management, and Governance’
At the most general level, Transaction Cost Economics (TCE) is a theory of how business
transactions are structured in challenging decision environments.
Consider a situation where the exchanging parties cannot fully rely on the price system or
the system of institutions (the government guarantees with laws that the milk you buy is of
good quality). Contracting parties then must seek information that may be costly to obtain;
they must agree upon and enforce a potentially complex buyer-supplier contract. TCE is a
theory that emphasizes the importance of understanding this complexity.
According to TCE, three dimensions that merit (= verdienen) attention are frequency,
uncertainty, and specificity. All three should be thought of as characteristics of a contractual
exchange relationship between two exchange parties:
1. Frequency refers to the volume of transactions between the two exchange parties.
Contractual relationships are always associated with a cost, and with larger volumes
(i.e., recurring transactions), costs of specialized governance structures can be
justified, for instance (Williamson, 1985, p. 60).
2. Uncertainty refers to the contracting parties’ limited ability to predict environmental
changes and one another’s behavior (behavioral uncertainty) under unforeseen
circumstances. The two exchange parties always have interests that are only partially
overlapping, and disagreements are a source of cost. In complex exchange
relationships, it is simply impossible to write a complete contract that covers all
possible contingencies. TCE works out of the assumption that contracts are
incomplete.
3. Specificity refers to specialized investments made by one party, or both parties, to
enable the exchange. Specificity takes many different forms:
Site specificity (e.g., an electric plant)
Physical asset specificity (e.g., specialized tools)
Human asset specificity (e.g., firm-specific knowledge)
Importantly, specificity gives rise to dependency, which may be either unilateral or
bilateral; it can create a situation in which one party to the transaction may see a
possibility to take advantage of the other party. Indeed, such economic “holdup
problems” sometimes occur in practice.
TCE can be applied to a lot of decisions within and across firms:
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