|specific investments. Upon making this substitution, the organization of capital markets and intermediate-product markets is broadly similar.|
Transaction-cost economics is an interdisciplinary undertaking that joins economics with aspects of organization theory and overlaps extensively with contract law. It is the modern counterpart of institutional economics and relies heavily on comparative analysis. 79 Frictionless ideals are useful mainly for reference purposes.
Although mathematical economics captures only a fraction of the transaction-cost phenomena of interest, 80 this has not been the only obstacle. Headway with the study of transaction-cost issues has been impeded by lack of verbal definitions. Identifying the critical dimensions with respect to which transactions differ has been a significant omission.
This paper attempts to rectify this deficiency and identifies uncertainty, frequency of exchange, and the degree to which investments are transaction- specific as the principal dimensions for describing transactions. The efficient organization of economic activity entails matching governance structures with these transactional attributes in a discriminating way.
Although the main applications in this paper are to commercial contracting, the proposed approach generalizes easily to the study of labor contracts. It also has ramifications for understanding both public utility regulation and family relations. A unified approach to contract thus emerges.
The fact that the broad features of so many varied transactions fit within the framework is encouraging. The importance of transaction costs to the organization of economic activity is thus confirmed. But the world of contract is enormously complex, 81 and the simple economizing framework proposed here cannot be expected to capture more than main features. Elaborating the framework to deal with microanalytic phenomena, however, should be feasible. And extending it to include additional or substitute dimensions (of which the ease of verification, in the case of capital-market transactions, is an example) may sometimes be necessary.