Firms, Organizations and Contracts: A Reader in Industrial Organization

By Peter J. Buckley; Jonathan Michie | Go to book overview

6 Transaction-Cost Economics: The Governance of Contractual Relations

Oliver E. Williamson

The new institutional economics is preoccupied with the origins, incidence, and ramifications of transaction costs. Indeed, if transaction costs are negligible, the organization of economic activity is irrelevant, since any advantages one mode of organization appears to hold over another will simply be eliminated by costless contracting. But despite the growing realization that transaction costs are central to the study of economics, 1 skeptics remain. Stanley Fischer's complaint is typical: "Transaction costs have a well-deserved bad name as a theoretical device . . . [partly] because there is a suspicion that almost anything can be rationalized by invoking suitably specified transaction costs.' 2 Put differently, there are too many degrees of freedom; the concept wants for definition.

Among the factors on which there appears to be developing a general consensus are: (1) opportunism is a central concept in the study of transaction costs; 3 (2) opportunism is especially important for economic activity that involves transaction-specific investments in human and physical capital; 4 (3) the efficient processing of information is an important and related concept; 5 and (4) the assessment of transaction costs is a comparative institutional undertaking. 6 Beyond these general propositions, a consensus on transaction costs is lacking.

____________________
This paper has benefited from support from the Center for Advanced Study in the Behavioral Sciences, the Guggenheim Foundation, and the National Science Foundation. Helpful comments by Yoram Ben-Porath, Richard Nelson, Douglass North, Thomas Palay, Joseph Sax, David Teece, and Peter Temin and from the participants at seminars at the Yale Law School and the Institute for Advanced Study at Princeton are gratefully acknowledged. The paper was rewritten to advantage after reading Ben-Porath's discussion paper, the F-Connection: Family, Friends, and Firms and the Organization of Exchange, and Temin's discussion paper, Modes of Economic Behavior: Variations on Themes of J. R. Hicks and Herbert Simon.

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