The Economics of Organization,The Transaction Cost Approach

Article: The Economics of Organization: The Transaction Cost Approach

Authors: Oliver E. Williamson

Citation: The American Journal of Sociology, Vol. 87, No. 3 (Nov., 1981), pp. 548-577

Type of Research: Theoretical Research

Topics:

To describe transaction costs and effort to economize thereon.

1)The antecedent literature from which the transaction cost approach derives.

2)The rudiments of the approach, including the dimensionalizing of transactions.

3)Applications to the study of efficient boundaries.

4)Employment relation issues.

5)Comparisons with selected aspects of the organization theory literature and contrasts with

“power” approaches to eh study of organizations.

6)Concluding remarks.

1.ANTECEDENTS

●The transaction cost approach to the study of organizations relates to three relatively

independent literatures.

1)Economics literature

2)Organization theory literature

3)Contract law literature, in which contract is addressed as a governance issue

● A deepening awareness of transaction cost issues marks the progression of each of the

literatures:

1)The study of organizations was a comparative institutional undertaking in which alternative

governance structures –both within and between firms and markets –required explicit attention.

2)As the transactions of interest were not all of a kind, differences among them would

evidently have to be recognized.

3)Put differently, transaction cost economizing needs to be located within a lager economizing

framework and the relevant trade-offs need to be recognized.

2.SOME RUDIMENTS

●Motivation:

Can we identify the factors that permit transactions to be classified as one kind or another?

Can we identify the alternative governance structures within which transactions can be organized?

Can we match governance structures with transactions in a discriminating (transaction-cost-economizing) way?

●Behavioral Assumptions –“human nature as we know it”

1)The recognition that human agents are subject to bounded rationality.

Given bounded rationality, it is impossible to deal with complexity in all contractually relevant respects. As a consequence, incomplete contracting is the best that can be achieved.

2)The assumption that at least some agents are given to opportunism.

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