Transaction Cost Economics

Synonyms

Organizational economics; Transaction cost theory

Definition

Transaction cost economics is understood as alternative modes of organizing transactions (governance structures – such as markets, hybrids, firms, and bureaus) that minimize transaction costs (Williamson 1979). Transaction cost theory (Williamson 1979, 1986) posits that the optimum organizational structure is one that achieves economic efficiency by minimizing the costs of exchange. The theory suggests that each type of transaction produces coordination costs of monitoring, controlling, and managing transactions. Williamson has defined transaction costs broadly as the costs of running the economic system of firms. He has argued that such costs are to be distinguished from production costs and that a decision-maker can make a choice to use a firm structure or source from the market by comparing transaction costs with internal production costs. Thus, cost is the primary determinant of such a decision.

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