Abstract
This paper begins with a sketch of the New Institutional Economics, with special emphasis on the ‘institutional environment’ (North and others) and the ‘institutions of governance’ (Coase and others). Thereafter the paper mainly emphasizes the applications of transaction cost economics to the study of governance, the object being to effect an economizing alignment between transactions, which differ in their attributes, and governance structures (firms, markets, hybrids, bureaus), which differ in their cost and competence. I raise a series of issues – phenomena of interest, describing human agents, describing firms, purposes served, scaling up – to which any would-be theory of the firm should be expected to speak and indicate how transaction cost economics responds to each. I thereafter describe the mechanisms through which transaction cost economics is implemented and develop some of the core conceptual supports out of which it works. Applications to public bureaus, strategic management, and intractable transactions are sketched.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
REFERENCES
Alchian, Armen, and Harold Demsetz, 1972, ‘Production, Information Costs, and Economic Organization,’ American Economic Review, 62, pp. 77–795.
Aoki, Masahiko, 1990, ‘Toward an Economic Model of the Japanese Firm,’ Journal of Economic Literature, 28, pp. 1–27.
Arrow, Kenneth J. 1963, ‘Uncertainty and the Welfare Economics of Medical Care,’ American Economic Review, 53, pp. 941–973.
Arrow, Kenneth J., 1969, ‘The Organization of Economic Activity: Issues Pertinent to the Choice of Market Versus Nonmarket Allocation,’ in: The Analysis and Evaluation of Public Expenditure: The PPB System. 1, U.S. Joint Economic Committee, 91st Cong., 1st Sess. Washington, DC, US Government: Printing Office, pp. 59–73.
Arrow, Kenneth J., 1987, ‘Reflections on the Essays,’ in: George Feiwel (ed.), Arrow and the Foundations of the Theory of Economic Policy, New York, New York University Press, pp. 727–734.
Arrow, Kenneth J., 1989, ‘Competing Technologies, Increasing Returns, and Lock-in by Historical Events,’ Economic Journal, 99, pp. 116–131.
Bain, Joe, 1968, Industrial Organization, New York, Wiley.
Baker, George, Robert Gibbons, and Kevin Murphy, 1997, ‘Implicit Contracts and the Theory of the Firm,’ unpublished manuscript.
Barnard, Chester, 1938, The Functions of the Executive, Cambridge, MA, Harvard University Press.
Barnett, W., and G. Carroll, 1993, ‘How Institutional Constraints Affected the Organization of the Early American Telephone Industry,’ Journal of Law, Economics, and Organization, 9, pp. 98–126.
Ben-Ner, Avner, and Theresa Van Hoomissen, 1991, ‘Nonprofit Organizations in the Mixed Economy,’ Annals of Public and Cooperative Economics, 62, pp. 519–550.
Bromley, Daniel, 1989, Economic Interest and Institutions, New York, Basil Blackwell.
Buchanan, James, 1975, ‘A Contractarian Paradigm for Applying Economic Theory,’ American Economic Review, 65, pp. 225–230.
Chandler, Alfred D., Jr. 1962, Strategy and Structure, Cambridge, MA, MIT Press.
Coase, Ronald H., 1937, ‘The Nature of the Firm,’ Economica N.S., 4, pp. 386–405. Reprinted in G.J. Stigler and K.E. Boulding (eds.), Readings in Price Theory, Homewood, IL, Richard D. Irwin.
Coase, Ronald H., 1959, ‘The Federal Communications Commission,’ Journal of Law and Economics, 2, pp. 1–40.
Coase, Ronald H., 1960, ‘The Problem of Social Cost,’ Journal of Law and Economics, 3, pp. 1–44.
Coase, Ronald H., 1964, ‘The Regulated Industries: Discussion,’ American Economic Review, 54, pp. 194–197.
Coase, Ronald H., 1972, ‘Industrial Organization: A Proposal for Research,’ in: V.R. Fuchs (ed.), Policy Issues and Reseach Opportunities in Industrial Organization, New York, National Bureau of Economic Research, pp. 59–73.
Coase, Ronald H., 1978, ‘Economics and Contiguous Disciplines,’ Journal of Legal Studies, 7, pp. 201–211.
Coase, Ronald H., 1984, ‘The New Institutional Economics,’ Journal of Institutional and Theoretical Economics, 140, pp. 229–231.
Coase, Ronald H., 1992, ‘The Institutional Structure of Production,’ American Economic Review, 82, pp. 713–719.
Commons, John, R., 1932, ‘The Problem of Correlating Law, Economics and Ethics,’ Wisconsin Law Review, 8, pp. 3–26.
Cosmides, Leda, and John Tooby, 1996, ‘Are Humans Good Intuitive Statisticians After All?,’ Cognition, 58, pp. 1–73.
Crocker, Keith, and Scott Masten, 1996, ‘Regulation and Administered Contracts Revisited: Lessons from Transaction Cost Economics for Public Utility Regulation,’ Journal of Regulatory Economics, 8, pp. 5–39.
Cyert, Richard, and James March, 1963, A Behavioral Theory of the Firm, Englewood Cliffs, NJ, Prentice-Hall.
David, Paul, 1985, ‘Clio in the Economics of QWERTY,’ American Economic Review, 75, pp. 332–337.
Davis, Lance, and Douglass North, 1971, Institutional Change and American Economic Growth, Cambridge, Cambridge University Press.
Debreu, Gerard, 1959, Theory of Value, New York, John Wiley and Sons.
Demsetz, Harold, 1967, ‘Toward a Theory of Property Rights,’ American Economic Review, 57, pp. 347–359.
Demsetz, Harold, 1969, ‘Information and Efficiency: Another Viewpoint,’ Journal of Law and Economics, 12, pp. 1–22.
Dixit, Avinash, 1996, The Making of Economic Policy: A Transaction Cost Politics Perspective, Cambridge, MIT Press.
Dosi, Giovanni, 1988, ‘Sources, Procedures, and Microeconomic Effects of Innovation,’ Journal of Economic Literature, 26, pp. 1120–1171.
Elster, Jon, 1994, ‘Arguing and Bargaining in Two Constituent Assemblies,’ unpublished manuscript.
Farnsworth, E. Allan, 1990, Farnsworth on Contracts, 1, Boston, Little-Brown.
Fischer, Stanley, 1977, ‘Long-term Contracting, Sticky Prices, and Monetary Policy: Comment,’ Journal of Monetary Economics, 3, pp. 317–324.
Fogel, Robert William, and Stanley L. Engerman (eds.), 1971, The Reinterpretation of American Economic History, New York, Harper and Row.
Fogel, Robert William, and Stanley L. Engerman, 1974, Time on the Cross: The Economics of American Negro Slavery, Boston, Little-Brown.
Fogel, Robert William, and Stanley L. Engerman, 1992, Without Consent or Contract: The Rise and Fall of American Slavery, New York, Norton.
Furubotn, Eirik, and Rudolf Richter, 1991, ‘The New Institutional Economics: An Assessment,’ in: E. Furubotn en R. Richter (eds.), The New Institutional Economics, College Station, TX, Texas A&M University Press, pp. 1–32.
Galanter, Marc, 1981, ‘Justice in Many Rooms: Courts, Private Ordering, and Indigenous Law,’ Journal of Legal Pluralism, 19, pp. 1–47.
Georgescu-Roegen, N., 1971, The Entropy Law and Economic Process, Cambridge, MA, Harvard University Press.
Goldberg, Victor, 1976, ‘Regulation and Administered Contracts,’ Bell Journal of Economics, 7, pp. 426–452.
Granovetter, Mark, 1985, ‘Economic Action and Social Structure: The Problem of Embeddedness,’ American Journal of Sociology, 91, pp. 481–501.
Grossman, Sanford, and Oliver Hart, 1986, ‘The Costs and Benefits of Ownership: A Theory of Vertical and Leteral Integration,’ Journal of Political Economy, 94, pp. 691–719.
Hannan, Michael T., and John Freeman, 1977, ‘The Population Ecology of Organizations,’ American Journal of Sociology, 82, pp. 929–964.
Hansmann, Henry, 1980, ‘The Role of Nonprofit Enterprise,’ Yale Law Journal, 89, pp. 835–901.
Hart, Oliver, 1995, Firms, Contracts, and Financial Structure, New York, Oxford University Press.
Hayek, Friedrich, 1945, ‘The Use of Knowledge in Society,’ American Economic Review, 35, pp. 519–530.
Henisz, Witold, 1996, ‘A Case Study of the Institutions and Governance of Economic Reform: New Zealand's State Owned Enterprises,’ unpublished manuscript.
Hennipman, Pieter, 1995, Welfare Economics and the Theory of Economic Policy, Brookfield, VT, Edward Elgar.
Holmstrom, Bengt, 1979, ‘Moral Hazard and Observability,’ Bell Journal of Economics, 10, pp. 74–91.
Holmstrom, Bengt, 1996, ‘The Firm as a Subeconomy,’ (unpublished manuscript).
Holmstrom, Bengt, and Paul Milgrom, 1991, ‘Multi-task Principal-Agent Analysis,’ Journal of Law, Economics, and Organization, 7, pp. 24–52.
Huntington, Samuel. P., 1996, The Clash of Civilizations and the Remaking of World Order, New York, Simon and Schuster.
Hurst, J.W., 1964, Law and Economic Growth: The Legal History of the Lumber Industry in Wisconsin, 1836–1915, Madison, University of Wisconsin Press.
James, Estelle, 1987, ‘The Nonprofit Sector in Comparative Perspective,’ in: Walter Powell (ed.), The Nonprofit Sector, New Haven, Yale University Press, pp. 397–415.
Joskow, Paul, 1991, ‘The Role of Transaction Cost Economics in Antitrust and Public Utility Regulatory Policies,’ Journal of Law, Economics, and Organization, 7, pp. 53–83.
Klein, Benjamin, R.A. Crawford, and A.A. Alchian, 1978, ‘Vertical Integration, Appropriable Rents, and the Competitive Contracting Process,’ Journal of Law and Economics, 21, pp. 297–326.
Kreps, David, 1990, ‘Corporate Culture and Economic Theory, in: James Alt and Kenneth Shepsle (eds.), Perspectives on Positive Political Economy, Cambridge, Cambridge University Press, pp. 90–143
Kreps, David, 1996, ‘Markets and Hierarchies and (Mathematical) Economic Theory,’ Industrial and Corporate Change, 5, pp. 561–596.
Kuhn, Thomas S., 1970, The Structure of Scientific Revolutions, 2nd ed., Chicago, University of Chicago Press.
Levy, Brian, and Pablo Spiller, 1994, ‘The Institutional Foundations of Regulatory Commitment,’ Journal of Law, Economics, and Organization, 10, pp. 201–246.
Lewis, Tracy, 1983, ‘Preemption, Divestiture, and Forward Contracting in a Market Dominated by a Single Firm,’ American Economic Review, 73, pp. 1092–1101.
Llewellyn, Karl N., 1931, ‘What Price Contract? An Essay in Perspective,’ Yale Law Journal, 40, pp. 704–751.
Lyons, Bruce, 1996, ‘Empirical Relevance of Efficient Contract Theory: Inter-firm Contracts,’ Oxford Review of Economic Policy, 12, pp. 27–52.
Macneil, Ian R., 1974, ‘The Many Futures of Contracts,’ Southern California Law Review, 47, pp. 691–816.
Macneil, Ian R., 1978, ‘Contracts, Adjustments of Long-term Economic Relations Under Classical, Neo-classical, and Relational Contract Law,’ Northwestern University Law Review, 72, pp. 854–906.
Mahoney, Joseph, and Rajendran Pandian, 1992, ‘The Resource-based View within the Conversation of Strategic Management,’ Strategic Management Journal, 13, pp. 363–380.
March, James G., and Herbert A. Simon, 1958, Organizations, New York, John Wiley and Sons.
Maskin, Eric, and Jean Tirole, 1997, ‘Unforeseen Contingencies, Property Rights, and Incomplete Contracts,’ Unpublished manuscript.
Masten, Scott, 1995, ‘Introduction to Vol. II,’ in: Oliver Williamson and Scott Masten (eds.), Transaction Cost Economics, Brookfield, VT, Edward Elgar.
Matthews, R.C.O., 1986, ‘The Economics of Institutions and the Sources of Economic Growth,’ Economic Journal, 96, pp. 903–918.
Michels, Robert, 1966, Political Parties, Glencoe, IL, Free Press.
Moe, Terry, 1984, ‘The New Economics of Organization,’ American Journal of Political Science, 28, pp. 739–777.
Moe, Terry, 1990, ‘The Politics of Structural Choice: Toward a Theory of Public Bureaucracy,’ in: Oliver Williamson (ed.), Organization Theory, New York, Oxford University Press, pp. 116–153.
Nee, Victor, 1997, ‘Embeddedness and Beyond,’ in: Mary Brinton and Victor Nee (eds.), The New Institutionalism in Sociology, New York, Russell Sage.
Nelson, Richard, and Sidney Winter, 1982, An Evolutionary Theory of Economic Change, Cambridge, MA, Harvard University Press.
Nickerson, Jackson A., 1997, ‘Toward and Economizing Theory of Strategy: The Choice of Strategic Position, Assets, and Organizational Form,’ University of California, Berkeley, unpublished Ph.D. dissertation.
North, Douglass, 1981, Structure and Change in Economic History, New York, Norton.
North, Douglass, 1984, ‘Transaction Costs, Institutions, and Economic History,’ Journal of Institutional and Theoretical Economics, 140, pp. 7–17.
North, Douglass, 1990, ‘A Transaction Cost Theory of Politics,’ Journal of Theoretical Politics, 2, pp. 355–367.
North, Douglass, 1991, ‘Institutions,’ Journal of Economic Perspectives, 5, pp. 97–112.
North, Douglass, 1994, ‘Economic Performance Through Time,’ American Economic Review, 84, pp. 357–368.
North, Douglass, and Barry Weingast, 1989, ‘Constitutions and Commitment: The Evolution of Institutions Governing Public Choice in 17th Century England,’ Journal of Economic History, 49, pp. 803–832.
Olson, Mancur, 1996, ‘Big Bills Left on the Sidewalk: Why Some Nations Are Rich, and Others Are Poor,’ Journal of Economic Perspectives, 10, pp. 3–24.
Priest, George, 1993, ‘The Origins of Utility Regulation and the “Theories of Regulation” Debate,’ Journal of Law and Economics, 36, pp. 289–323.
Putnam, Robert. D., Robert Leonardi, and Rafaella Y. Nanetti, 1993, Making Democracy Work: Civic Traditions in Modern Italy, Princeton, NJ, Princeton University Press.
Robinson, James, 1996, ‘Physician-Hospital Integration and the Economic Theory of the Firm,’ unpublished manuscript, School of Public Health, University of California, Berkeley.
Rose-Ackerman, Susan, 1996, ‘Altruism, Nonprofits, and Economic Theory,’ Journal of Economic Literature, 34, pp. 701–728.
Rosenberg, Nathan, and L.E. Birdzell, 1986, How the West Grew Rich: The Transformation of the Industrial World, New York, Basic Books.
Rubin, Edward, 1996, ‘The Phenomenology of Contract,’ Journal of Institutional and Theoretical Economics, 152, pp. 123–139.
Samuels, Warren J., (ed.), 1988, Institutional Economics (3 vols.), Aldershot, Edward Elgar.
Schlegel, John Henry, 1979, ‘American Legal Realism and Empirical Science: From The Yale Experience,’ Buffalo Law Review, 29, pp. 195–323.
Schultz, George, 1995, ‘Economics in Action,’ American Economic Review, 85, pp. 1–8.
Scott, Kenneth, 1996, ‘The Evolving Roles of Contract Law,’ Journal of Institutional and Theoretical Economics, 152, pp. 55–58.
Shelanski, Howard, and Peter Klein, 1995, ‘Empirical Research in Transaction Cost Economics: A Review and Assessment,’ Journal of Law, Economics, and Organization, 11, pp. 335–361.
Simon, Herbert, 1985, ‘Human Nature in Politics: The Dialogue of Psychology with Political Science,’ American Political Science Review, 79, pp. 293–304.
Simon, Herbert, 1991, ‘Organizations and Markets,’ Journal of Economic Perspectives, 5, pp. 25–44.
Smith, Vernon, 1994, ‘Economics in the Laboratory', Journal of Economic Perspectives, 8, pp. 113–131.
Stigler, George J., 1983, Comments in: Edmund W. Kitch (ed.), ‘The Fire of Truth: A Remembrance of Law and Economics at Chicago.
Stigler, George J., 1988, ‘Palgrave's Dictionary of Economics,’ Journal of Economic Literature, 26, pp. 1729–1736.
Stigler, George J., 1992, ‘Law or Economics?,’ Journal of Law and Economics, 35, pp. 455–468.
Summers, Clyde, 1969, ‘Collective Agreements and the Law of Contracts,’ Yale Law Journal, 78, pp. 537–575.
Teece, David J., Gary Pisano, and Amy Shuen, 1996, ‘Dynamic Capabilities and Strategic Management,’ Strategic Management Journal, 17, pp. xx–yy.
Teece, David J., Gary Pisano, and Amy Shuen, Richard Rumelt, Giovanni Dosi, and Sidney Winter, 1993, ‘Understanding Corporate Coherence,’ Journal of Economic Behavior and Organization, 22, pp. 1–30.
Thompson, James D., 1967, Organizations in Action, New York, McGraw-Hill.
Tullock, Gordon, 1996, ‘Legal Heresy: President's Address to the Western Economic Association,’ Economic Inquiry, 34, pp. 1–9.
Williamson, Oliver, 1971, ‘The Vertical Integration of Production: Market Failure Considerations,’ American Economic Review, 61, pp. 112–123.
Williamson, Oliver, 1975, Markets and Hierarchies: Analysis and Antitrust Implications, New York, Free Press.
Williamson, Oliver, 1976, ‘Franchise Bidding for Natural Monopolies - In General and with Respect to CATV,’ Bell Journal of Economics, 7, pp. 73–104.
Williamson, Oliver, 1979, ‘Transaction Cost Economics: The Governance of Contractual Relations,’ Journal of Law and Economics, 22, pp. 233–261.
Williamson, Oliver, 1985, The Economics Institutions of Capitalism, New York, Free Press.
Williamson, Oliver, 1991a, ‘Comparative Economic Organization: The Analysis of Discrete Structural Alternatives,’ Administrative Science Quarterly, 36, pp. 269–296.
Williamson, Oliver, 1991b, ‘Strategizing, Economizing, and Economic Organization,’ Strategic Management Journal, 12, pp. 75–94.
Williamson, Oliver, 1993a, ‘Calculativeness, Trust, and Economic Organization,’ Journal of Law and Economics, 36, pp. 453–486.
Williamson, Oliver, 1993b, ‘Transaction Cost Economics Meets Posnerian Law and Economics,’ Journal of Institutional and Theoretical Economics, 149, pp. 99–118.
Williamson, Oliver, 1996a, The Mechanisms of Governance, New York, Oxford University Press.
Williamson, Oliver, 1996b, ‘Revisiting Legal Realism: The Law, Economics, and Organization Perspective,’ Industrial and Corporate Change, 5, pp. 383–420.
Williamson, Oliver, 1997, ‘Public and Private Bureaus,’ unpublished manuscript.
Williamson, Oliver, and Scott Masten (eds.), 1995, Transaction Cost Economics, Brookfield, VT, Edward Elgar.
Wilson, James Q, 1989, Bureaucracy, New York, Basic Books.
Author information
Authors and Affiliations
Rights and permissions
About this article
Cite this article
Williamson, O.E. Transaction Cost Economics: How It Works; Where It is Headed. De Economist 146, 23–58 (1998). https://doi.org/10.1023/A:1003263908567
Issue Date:
DOI: https://doi.org/10.1023/A:1003263908567