Transaction Cost Theory Flashcards
Which article?
Williamson (1981)
Central focus
structuring firm boundary; alignment of transactions and governance structures
Central assumptions
opportunism, bounded rationality, efficient transacting as source of
competitive advantage
According to the TCT organizations exist because…
“hierarchy (unified governance) arises to resolve the problems of market governance with transaction specific investments and uncertainty’’
Invisible hand
Unit of analysis
transaction
organization of transactions
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?
Issue of transaction
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.
4 types of transaction costs
- Search costs (to identify potential partners)
- Contracting costs (negotiations)
- Monitoring costs (fulfilment of agreed terms, quality that was promised?)
- Enforcement costs (sanctioning/court from conflic
Critical dimensions for describing transaction
- Uncertainty
- The frequency with which transaction occur
- The degree to which durable, transaction specific investments are required to realize least cost
supply
Asset specificity
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.
High alternative use
low asset specifity
Low alternative use
High asset specifity
Higher levels of asset specificity leads to…
…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
How to choose governance structure?
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.
Dependent variable
Organization of transactions. (Choice of governance structure).
Independent variable
Characteristics of transactions (how transactions are organized).
Hierarchy, Unified governance
Investment specific and a lot of interaction, increase
transaction costs
Hybrid, Trilateral governance
occasional, need knowledge about market, quality etc. Working with
real estate agent, when selling house.
Hybrid, Bilateral Governance
recurrent, more than only economic relation → relational
governance.
Hierarchy
Formal org) Transactions among parties occur under a unified owner, who settles
disputes by administrative fiat
Hybrid
“Long-term contractual relations that preserve [parties’] autonomy, but provide added
transaction-specific safeguards as compared with the market.”
Bounded rationality
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.
Opportunism
If we get the opportunity, we will lie/cheat/misbehave
Opportunistic behaviour creates transaction costs.
Efficient transacting as source of competitive advantage (assumption)
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.
When are opportunism and bounded-rationality a problem?
- When there is uncertainty surrounding the transaction
- When asset-specific investments are required in a transaction
Criticism of TCT
- 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
Classical contract
non specific, but often.
Governance structure
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.
Market
Autonomous parties’ exchanges are governed by prices in supply-demand equilibrium
