Academic journal article Entrepreneurship: Theory and Practice

Transaction Cost Economics (TCE) and the Family Firm

Academic journal article Entrepreneurship: Theory and Practice

Transaction Cost Economics (TCE) and the Family Firm

Article excerpt

Gedajlovic and Carney's application of transaction cost economics (TCE) thinking to the family business builds on TCE's concept of asset specificity. Our analysis augments this application. We focus on TCE's behavioral assumptions, which act as drivers of failed human commitments. We show that both the exposure and response to bounded rationality and bounded reliability challenges may be different in family firms versus Chandlerian hierarchies, and introduce the new concept of family-based human asset specificity.


Oliver Williamson earned the 2009 Nobel Prize in Economics, largely based on his contributions to transaction cost economics (TCE) theory. TCE has emerged as a core paradigm in the management and organizational studies literature (Hill, 1990). Quickly becoming one of the leading perspectives in the field (David & Han, 2004), it has received much attention from a broad range of audiences (Rindfleisch & Heide, 1997) and has been subject to numerous empirical tests (Tsang, 2006). It is therefore commendable that the authors of "Markets, Hierarchies, and Families: Toward a Transaction Cost Theory of the Family Firm" (Gedajlovic & Carney, 2010) use TCE thinking to address various fundamental questions related to the existence, functioning, and performance of family firms. As family business research expands and matures, an increasing range of theories is being applied to the context of this particular governance form (Wiklund, 2006). Agency theory has frequently been used to explain family firm performance; stewardship and resource-based view theories have also been applied in analyses of the family firm (see Chua, Chrisman, & Sharma, 2003; Dyer, 2006; Westhead & Howorth, 2006). Gedajlovic and Carney's article represents a welcome addition to the conceptual thinking on the family firm.

In the following discussion, we augment Gedajlovic and Carney's (2010) perspective. We demonstrate the usefulness of TCE as a conceptual lens to study the family firm.

TCE and the Family Firm

Gedajlovic and Carney (20l0) argue that the family firm as an economic institution has been largely ignored by TCE. They portray the family firm as a discrete structural alternative, whereupon Williamson's (1975, 1985, 1996) "market vs. hierarchies" classification of polar governance forms can be applied. The authors focus on Williamson's asset-specificity concept, and argue that family firms are characterized by a distinct class of assets, which are firm specific but at the same time generic in application, termed generic nontradeables (GNTs). The authors identify four key types of GNTs: bonding of social capital, bridging of social capital, reputational assets, and tacit knowledge. Although the authors do not insist that these GNTs are unique to family firms, it is important to make it clear that they can also be found in nonfamily firms. Indeed, most Chandlerian hierarchies have an incentive to keep up a good reputation because professional managers can be fired and only have their reputation when applying for a job elsewhere. Furthermore, in certain cases, family firms may possess disadvantages in developing these GNTs or their development may lead to adverse consequences. For example, close social ties may promote unreliability, as the case of the fallen Wall Street money manager Bernard Madoff, and his family business, Madoff Investment Securities LLC, clearly illustrates.

The analysis of GNTs is also actually common in the more general, non-Williamsonian version of TCE, namely internalization theory. Internalization theory argues that firms exist because they command a set of idiosyncratic resource bundles, called firm-specific advantages (FSAs), which can be more efficiently exploited and rejuvenated inside the firm than through the use of alternative governance forms. Internalization theory suggests that some FSAs can be deployed and augmented across a variety of related markets, whether product markets or geographic markets, i. …

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