Oliver Williamson's Transaction Cost Approach

Oliver Williamson's Transaction Cost Approach

Introduction

The transaction cost approach regards the transaction as the basic unit of analysis and holds that understanding of transaction cost economizing is central to the study of organizations through assessing how their governance structures serve to economize on these transaction costs.

I. Antecedents

Asset specificity is important because it means that future trades are tied to this transaction, when specifics about the trader become important in deciding who to trade with. Advantage specificity can be connected to site, physical benefit, and human asset (i.e. learned knowledge as a result of the transaction).

II. Some Rudiments

"A transaction occurs when a good or service is transferred across a technogically separable interface". Is the transaction easy and harmonious, or are their frequent misunderstandings and delays? Transaction cost analysis is about the comparative costs of planning, adapting, and monitoring task completion under alternative governance structures" (Williamson, 1985, p. 89)

This theory presupposes that human agents are subject to bounded rationality and that some agents are given to opportunism. But for bounded rationality, all financial exchange could be professionally organized by contract. "A different way of saying it is that while organizational man is computationally less competent than economic man, he is motivationally more complex" (Williamson, 1991, p. 89). In a perfect market opportunism can be avoided and punished over time, but not when there are small numbers of exchangers. The critical dimensions for transactions are 1) uncertainty 2) frequency, 3)degree of durability

Asset specificity is important because it means that future trades are tied to this transaction, when specifics about the trader become important in deciding who to trade with. Advantage specificity can be connected to site, physical benefit, and human asset (i.e. learned knowledge as a result of the transaction).

"The reason asset specificity is critical is that, once an investment has been made, buyer and seller are effectively operating in a bilater (or at least quasi-bilateral) exchange relation for a considerable period thereafter (Williamson, 1988, p. 89).

 

III. Efficient Boundaries

Decided what transactions are to be included in the organization effectively defines the organizaitonal boundary.

If assets are nonspecific, markets enjoy advantages in both manufacture cost and governance cost compliments; static scale economies can be more fully worn out by buying instead of making; markets can also aggregate uncorrelated demands, in this manner realizing risk-pooling benefits; and outside procurement avoids many of the hazards to which internal procruement is subject". p. 558

The advantages of firms over markets are:

internal organization are able to invoke fiat to resolve differences

better access to information

Incentive to shift transactions inside the firm increases with uncertainty. Some examples are the Fischer body company and GM, forward integration into distribution (Williamson, 1985, p. 96).

 

IV. Managing Human Assets: The Employment Relation

According to transaction-cost approach, "skills acquired in a learning-by-doing fashion and imperfectly transferable across employees need to be embedded in a protective governence structure.

Human assets can also be deliberate by 1) degree of firm-specificy and 2) difficulty of person productivity measurability Low of 1 and 2 is a interior ...