Transaction cost economics is a theory of the firm, most closely associated with Ronald Coase's foundational 1937 article The Nature of the Firm and later substantially developed by Oliver Williamson, that explains why economic activity is organized within firms rather than coordinated entirely through market transactions. The theory holds that firms exist because conducting certain transactions through markets involves costs, such as the costs of searching for a trading partner, negotiating and enforcing a contract, and safeguarding against opportunistic behavior, that can be reduced by bringing the transaction inside a single organization instead. Transaction cost economics is widely used in management and strategy to analyze decisions such as whether a company should make a component itself or buy it from an outside supplier.
Facts
Core ClaimTransaction cost economics analyzes the costs incurred in making an economic exchange, including planning, deciding, changing plans, resolving disputes and enforcement, as a determinant of how firms and markets are organized. 1 Cross-Tradition Connections
Associated With
Transaction cost economics and agency theory are sibling theories of the firm within New Institutional Economics.
Sources
1. Wikipedia, Transaction Cost Economics
WikipediaWikipedia, Transaction cost Definition sectionQuote, Wikipedia, Transaction cost Definition section
Williamson defines transaction costs as a cost innate in running an economic system of companies, comprising the total costs of making a transaction, including the cost of planning, deciding, changing plans, resolving disputes, and after-sales.
1. Wikipedia, Transaction Cost Economics
WikipediaWikipedia, Transaction cost lead sectionQuote, Wikipedia, Transaction cost lead section
The idea that transactions form the basis of economic thinking was introduced by the institutional economist John R. Commons in 1931.
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