The Economics of Organization: The Transaction Cost Approach

TLDR

The transaction cost approach treats the transaction as the fundamental unit of analysis and emphasizes that reducing transaction costs is key to understanding organizational structure. It requires measuring transaction dimensions, describing governance alternatives, and allocating transactions to the most efficient governance structure, thereby informing firm–market boundaries and internal arrangements such as employment relations, and is contrasted with other organization theories.

Abstract

The transaction cost approach to the study of economic organization regards the transaction as the basic unit of analysis and holds that an understanding of transaction cost economizing is central to the study of organizations. Applications of this approach require that transactions be dimensionalized and that alternative governance structures be described. Economizing is accomplished by assigning transactions to governance structures in a discriminating way. The approach applies both to the determination of efficient boundaries, as between firms and markets, and to the organization of internal transactions, including the design of employment relations. The approach is compared and contrasted with selected parts of the organization theory literature.