Transaction cost economics

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Transaction cost economics



Alternate name(s)

Transaction cost theory, theory of the firm, markets and hierarchies / electronic hierarchies and electronic markets /

Main dependent construct(s)/factor(s)

Governance structure, degree of outsourcing, outsourcing success, inter-organizational coordination and collaboration

Main independent construct(s)/factor(s)

Coordination costs, transaction risk (opportunity costs), coordination costs, operational risk, opportunism risk, asset specificity , uncertainty, trust

Concise description of theory

In economics and related disciplines, a transaction cost is a cost incurred in making an economic exchange. A number of different kinds of transaction costs exist. Search and information costs are costs such as those incurred in determining that the required good is available on the market, who has the lowest price, etc. Bargaining costs are the costs required to come to an acceptable agreement with the other party to the transaction, drawing up an appropriate contract, etc.. Policing and enforcement costs are the costs of making sure the other party sticks to the terms of the contract, and taking appropriate action (often through the legal system) if this turns out not to be the case.

Transaction costs consist of costs incurred in searching for the best supplier/partner/customer, the cost of establishing a supposedly "tamper-proof" contract, and the costs of monitoring and enforcing the implementation of the contract. Transaction cost theorists assert that the total cost incurred by a firm can be grouped largely into two components—transaction costs and production costs. Transaction costs, often known as coordination costs, are well defined as the costs of "all the information processing necessary to coordinate the work of people and machines that perform the primary processes," whereas production costs include the costs incurred from "the physical or other primary processes necessary to create and distribute the goods or services being produced"

Transaction cost economics suggests that the costs and difficulties associated with market transactions sometimes favor hierarchies (or in-house production) and sometimes markets as an economic governance structure. An intermediate mechanism, called hybrid or relational, between these two extremes has recently emerged as a new governance structure .

Kumar, Kuldeep, Van Dissel, Han G., Bielli, Paola, "The Merchant of Prato--Revisited: Toward a Third Rationality of Information Systems", MIS Quarterly, Jun98, Vol. 22, Issue 2.
Malone, T.W.; Yates, J.; and Benjamin, R.I., "Electronic markets and electronic hierarchies:, Communications of the ACM, 30, 6 (1987),p. 485.

Diagram/schematic of theory


Originating author(s)

Ronald Coase (1937, 1960), Oliver Williamson (1981, 1985), Klein, Crawford, Alchian (1978)

Seminal articles

Coase, Ronald H. 1937. The nature of the firm. Economica, 4: 386.

Coase, Ronald H. 1960. The problem of social cost. Journal of Law and Economics, 3: 1-44.

Klein, Crawford, RA Alchian, AA. 1978. Vertical integration, appropriable rents, and the competitive contracting process.

Oliver, W. 1975. Markets and hierarchies: Analysis and antitrust implications. New York, NY: Free Press.

Williamson, Oliver E. 1979. Transaction-cost economics: The governance of contractual relations. Journal of Law and Economics, 22(2): 233-261.

Williamson, Oliver E. 1981. The economics of organization: The transaction cost approach. The American journal of sociology, 87(2): 233.

Williamson, O.E. 1985. The economic institutions of capitalism : Firms, markets, relational contracting. New York, NY: Free Press.

Originating area


Level of analysis


IS articles that use the theory

Ang, Soon, & Straub, Detmar W. 1998. Production and transaction economies and IS outsourcing: A study of the U.S. banking industry. MIS Quarterly, 22(4): 535-552.

Aubert, Benoit A., Rivard, Suzanne, & Patry, Michel. 1996. A transaction cost approach to outsourcing behavior: Some empirical evidence. Information & Management, 30(2): 51-64.

Bahli, Bouchaib, & Rivard, Suzanne. 2003. The information technology outsourcing risk: A transaction cost and agency theory-based perspective. Journal of Information Technology (Routledge, Ltd.), 18(3): 211-221.

Bakos, J. Y., & Treacy, Michael E. 1986. Information technology and corporate strategy: A research perspective. MIS Quarterly, 10(2): 106.

Bakos, Yannis, J., Brynjolfsson, & Erik. 1993. Information technology, incentives, and the optimal number of suppliers. Journal of Management Information Systems, 10(2): 37.

Bunduchi, Raluca. 2005. Business relationships in internet-based electronic markets: The role of goodwill trust and transaction costs. Information systems journal, 15(4): 321.

Cannel, Erran Nicholson, Brian. 2005. Small firms and offshore software outsourcing: High transaction costs and their mitigation. Journal of global information management, 13(3): 33.

Choudhury, Vivek, & Sampler, Jeffrey L. 1997. Information specificity and environmental scanning: An economic perspective. MIS Quarterly, 21(1): 25.

Christopher, M. H., & Kemerer, Chris F. 1994. Computerized loan origination system: An industry case study of the electronic markets.. MIS Quarterly, 18(3): 251.

Ciborra, CU. 1983. Markets, bureaucracies and groups in the information society: An institutional appraisal of the impacts of information technology. Information economics and policy, 1: 145.

Clemons, Eric K., & Hitt, Lorin M. 2004. Poaching and the misappropriation of information: Transaction risks of information exchange. Journal of Management Information Systems, 21(2): 87-107.

Clemons, Eric K., & Reddi, Sashidhar P. 1993. The impact of information technology on the organization of economic activity: The `move to the.. Journal of Management Information Systems, 10(2): 9.

Clemons, Eric K., & Row, Michael C. 1992. Information technology and industrial cooperation: The changing economics of coordination and ownership. Journal of Management Information Systems, 9(2): 9.

Garicano, Luis, & Kaplan, Steven N. 2001. The effects of business-to-business E-commerce on transaction costs. Journal of Industrial Economics, 49(4): 463-485.

Gennotte, Gerard, & Jung, Alan. 1994. Investment strategies under transaction costs: The finite horizon case. Management Science, 40(3): 385-404.

Grover, Varun, & Cheon, Myun J. 1996. The effect of service quality and partnership on the outsourcing of information systems functions. Journal of Management Information Systems, 12(4): 89.

Gurbaxani, Whang,. 1991. The impact of information systems on organizations and markets. Communications of the ACM, 34(1): 59.

Heiman, Bruce, & Nickerson, Jack A. 2002. Towards reconciling transaction cost economics and the knowledge-based view of the firm: The context of interfirm collaborations. International Journal of the Economics of Business, 9(1): 97-116.

Hitt, Lorin M. 1999. Information technology and firm boundaries: Evidence from panel data. Information Systems Research, 10(2): 134-149.

Kambil, Ajit, & van Heck, Eric. 1998. Reengineering the dutch flower auctions: A framework for analyzing exchange organizations. Information Systems Research, 9(1): 1.

Kauffman, Robert J., & Mohtadi, Hamid. 2004. Proprietary and open systems adoption in E-procurement: A risk-augmented transaction cost perspective. Journal of Management Information Systems, 21(1): 137-166.

Kleindorfer, Paul R., & Wu, D. J. 2003. Integrating long-and short-term contracting via business-to-business exchanges for capital-intensive industries. Management Science, 49(11): 1597-1615.

Kumar, Kuldeep, Van Dissel, Han G., & Bielli, Paola. 1998. The merchant of prato--revisited: Toward a third rationality of information systems. MIS Quarterly, 22(2): 199-226.

Lacity, Mary C., & Willcocks, Leslie P. 1995. Interpreting information technology sourcing decisions from a transaction cost perspective: Findings and critique. Accounting, Management and Information Technologies, 5(3-4): 203-244.

Lee, HG Clark, TH. 1996. Impacts of the electronic marketplace on transaction cost and market structures. International journal of electronic commerce, 1(1): 127.

Liang, Ting Huang, Jin. 1998. An empirical study on consumer acceptance of products in electronic markets: A transaction cost... Decision support systems, 24(1): 29.

Lichtenstein, Yossi. 2004. PUZZLES in software development contracting. Communications of the ACM, 47(2): 61-65.

Malone, Thomas Yates, Joanne Benjamin, Robert. 1987. ELECTRONIC MARKETS AND ELECTRONIC HIERARCHIES. Communications of the ACM, 30(6): 484.

Monteverde, Kirk. 1995. Technical dialog as an incentive for vertical integration in the semiconductor industry. Management Science, 41(10): 1624.

Mosakowski, Elaine. 1991. Organizational boundaries and economic performance: An empirical study of entrepreneurial computer firms. Strategic Management Journal, 12(2): 115-133.

Ngwenyama, K, Ojelanki, Bryson, & Noel. 1999. Making the information systems outsourcing decision: A transaction cost approach to analyzing outsourcing decision problems. European Journal of Operational Research, 115(2): 351.

Novak, Sharon, & Eppinger, Steven D. 2001. Sourcing by design: Product complexity and the supply chain. Management Science, 47(1): 189.

Qu, Zhonghua, & Brocklehurst, Michael. 2003. What will it take for china to become a competitive force in offshore outsourcing? an analysis of the role of transaction costs in supplier selection. Journal of Information Technology (Routledge, Ltd.), 18(1): 53.

Saarinen, Timo, & Vepsalainen, Ari P. J. 1994. Procurement strategies for information systems. Journal of Management Information Systems, 11(2): 187.

Shane, Scott. 2002. Selling university technology: Patterns from MIT. Management Science, 48(1): 122-137.

Silverman, Brian S. 1999. Technological resources and the direction of corporate diversification: Toward an integration of.. Management Science, 45(8): 1109.

Subramani, Mani. 2004. How do suppliers benefit from information technology use in supply chain relationships?[1]. MIS Quarterly, 28(1): 45-73.

Teo, Thompson S. H., & Yu, Yuanyou. 2005. Online buying behavior: A transaction cost economics perspective. Omega, 33(5): 451-465.

Wang, Eric T. G. 2002. Transaction attributes and software outsourcing success: An empirical investigation of transaction cost theory. Information Systems Journal, 12(2): 153-181.

Wareham, Jonathan. 2003. Information assets in interorganizational governance: Exploring the property rights perspective. IEEE transactions on engineering management, 50(3): 337.

Welty, Bill Becerra-Fernandez, Irma. 2001. MANAGING TRUST AND COMMITMENT IN COLLABORATIVE SUPPLY CHAIN RELATIONSHIPS. Communications of the ACM, 44(6): 67.

Yannis Bakos, J. (., & Kemerer, Chris F. (. 1992. Recent applications of economic theory in information technology research. Decision Support Systems, 8(5): 365-386.

Young-Ybarra, Candace, & Wiersema, Margarethe. 1999. Strategic flexibility in information technology alliances: The influence of transaction cost economics and social exchange theory. Organization Science: A Journal of the Institute of Management Sciences, 10(4): 439.

Zaheer, Akbar, & Venkatraman, N. 1994. Determinants of electronic integration in the insurance industry: An empirical test. Management Science, 40(5): 549-566.

Ziedonis, Rosemarie H. 2004. Don 't fence me in: Fragmented markets for technology and the patent acquisition strategies of firms. Management Science, 50(6): 804-820.

Links from this theory to other theories

Agency theory, Resource dependency theory, Organizational governance

External links, Wikipedia entry on TCE, An introduction about TCE together with some useful links

Original Contributor(s)

Hamid Akbari

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