Transaction Cost Theory

Question 1

Which article?

Answer 1

Williamson (1981)

Question 2

Central focus

Answer 2

structuring firm boundary; alignment of transactions and governance structures

Question 3

Central assumptions

Answer 3

opportunism, bounded rationality, efficient transacting as source of
competitive advantage

Question 4

According to the TCT organizations exist because…

Answer 4

“hierarchy (unified governance) arises to resolve the problems of market governance with transaction specific investments and uncertainty’’

Question 5

Invisible hand

Question 6

Unit of analysis

Answer 6

transaction

Question 7

organization of transactions

Answer 7

what problem do we encounter every time when we buy something? When I buy a new TV, how can I be sure that I buy a good TV?

Question 8

Issue of transaction

Answer 8

problem of information asymmetry.

For example, the seller of a car has more information than the buyer of the car has. This creates uncertainty on the side of the buyer. How do people solve this problem of information asymmetry when buying a car? You may go to a mechanics to test the car, you let your brother who knows a lot about cars look at the car.

Question 9

4 types of transaction costs

Answer 9

1. Search costs (to identify potential partners)
2. Contracting costs (negotiations)
3. Monitoring costs (fulfilment of agreed terms, quality that was promised?)
4. Enforcement costs (sanctioning/court from conflic

Question 10

Critical dimensions for describing transaction

Answer 10

1. Uncertainty
2. The frequency with which transaction occur
3. The degree to which durable, transaction specific investments are required to realize least cost
   supply

Question 11

Asset specificity

Answer 11

It is only about those investments to make the exchange/interaction between two actors
possible. Asset specificity is a characteristic of an interaction.
All investments the parties do to make a transaction possible: When going to AH, buying a cucumber, the machine tells you how to pay, AH had to make investments for these systems.

Question 12

High alternative use

Answer 12

low asset specifity

Question 13

Low alternative use

Answer 13

High asset specifity

Question 14

Higher levels of asset specificity leads to…

Answer 14

…the choice of a more hierarchical governance structure

• Higher probability of ‘lock-in’
• Higher probability of opportunistic behaviour by partner
• Transaction costs to control such behaviour
• More hierarchical governance structure = economically more efficient

Question 15

How to choose governance structure?

Answer 15

Based on characteristics such as uncertainty, frequency and asset specifity.
The Higher the uncertainty, frequency and asset specificity the higher the chance hierarchy governance structure is chosen.

Question 16

Dependent variable

Answer 16

Organization of transactions. (Choice of governance structure).

Question 17

Independent variable

Answer 17

Characteristics of transactions (how transactions are organized).

Question 18

Hierarchy, Unified governance

Answer 18

Investment specific and a lot of interaction, increase
transaction costs

Question 19

Hybrid, Trilateral governance

Answer 19

occasional, need knowledge about market, quality etc. Working with
real estate agent, when selling house.

Question 20

Hybrid, Bilateral Governance

Answer 20

recurrent, more than only economic relation → relational
governance.

Question 21

Hierarchy

Answer 21

Formal org) Transactions among parties occur under a unified owner, who settles
disputes by administrative fiat

Question 22

Hybrid

Answer 22

“Long-term contractual relations that preserve [parties’] autonomy, but provide added
transaction-specific safeguards as compared with the market.”

Question 23

Bounded rationality

Answer 23

the idea that rationality is limited when individuals make decisions, by the tractability of the decision problem, the cognitive limitations of the mind, and the time available to make the
decision
- When you are very knowledgeable about how the other actor will behave, there will be no transaction costs. So not a problem!!
- When the uncertainty is higher, bounded rationality will become a problem.

Question 24

Opportunism

Answer 24

If we get the opportunity, we will lie/cheat/misbehave
Opportunistic behaviour creates transaction costs.

Question 25

Efficient transacting as source of competitive advantage (assumption)

Answer 25

If there are only a few buyers/sellers, then opportunistic behaviour is powerful. They take
advantage of being in need. The fewer buyers and sellers the higher the probability of opportunistic behaviour.

Question 26

When are opportunism and bounded-rationality a problem?

Answer 26

1. When there is uncertainty surrounding the transaction
2. When asset-specific investments are required in a transaction

Question 27

Criticism of TCT

Answer 27

• Too much focus on cost minimization
• Understates the costs of organizing (hierarchies cost!)
• Neglects importance of intra-organizational conflict
• Neglects social relationships in economic transactions

Question 28

Classical contract

Answer 28

non specific, but often.

Question 29

Governance structure

Answer 29

the framework of project management, especially regarding rules, procedures, roles and the division of responsibilities within the whole decision-making process. It keeps the project in check, allowing it to run flawlessly and in accordance with the plan.

Question 30

Market

Answer 30

Autonomous parties’ exchanges are governed by prices in supply-demand equilibrium