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Transaction Cost Approach

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(http://faculty.washington.edu/krumme/readings/transaction_cost.html)
The lower the transaction costs associated with a particular contractual assembly of inputs, the more likely self-interested individuals will choose that method of organizing production. (K.Leffler)

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Asset Specificity

Refers to the relative lack of transferability of assets intended for use in a given transaction to other uses. Highly specific assets represent sunk costs that have relatively little value beyond their use in the context of a specific transaction. Williamson has suggested six main types of asset specificity:
  1. site specificity
  2. physical asset specificity
  3. human asset specificity
  4. brand names
  5. dedicated assets
  6. temporal specificity
High asset specificity requires strong contracts or internalization to combat the threat of opportunism. Important example: Small subcontractors locating and investing next to only customer who could potentially turn to alternative suppliers (=site- and physical asset specificity).

The most popular example for the consequences of assets specificity has been the relationship between General Motors and Fisher Body between 1919 and 1926. After a 10 year contractual agreement was concluded in 1919, GM's demand for closed-body cars increased to extent that it became unhappy with the contractual price provisions and "urged Fisher to locate its body plants adjacent to GM assembly plants, thereby to realize transportation and inventory economies." [Williamson, AJS, p.561] Finally, Fisher Body was merged into GM in 1926 after Fisher had resisted GM's locational demands. As R.Coase recalls, "I was told [by GM officials] that the main reason for the acquisition was to make sure that the body plants were located next to General Motors assembly plants." [R.H.Coase, "The Nature of the Firm: Origin", in: Williamson & Winter, eds., The Nature of the Firm. 1993, p.43.]

Asymmetrical information distribution

Parties to a transaction have uneven access to relevant information. Such asymmetry may be based on information impactedness and be hazardous to the transaction.

INFORMATION IMPACTEDNESS (Williamson):

"A derivative condition that arises mainly because of uncertainty and opportunism, though bounded rationality is involved as well. It exists when true underlying circumstances relevant to the transaction, or related set of transactions, are known to one or more parties but cannot be costlessly discerned by or displayed for others." (Williamson, Market and Hierarchies, p.31) Particularly significant when there are sellers, buyers and intermediaries.

MORAL HAZARD

.. occurs when the actions of agents cannot be perfectly observed or contracted for directly. In a narrow sense, moral hazard has referred to possible effects which insurance contracts may have on the behavior of the insured persons. More general, economic terminology refers to moral hazard to imply the lack of observability of contingencies and the consequence of hidden, unverifiable action within contractual relationships.
[In the finance-, agency and
transaction cost literature, often referred to as part of (or overlapping with) "post-contractual opportunism", another part being "holdup", see, e.g., Alchian & Woodward in: JEL March 88, p.68]
moral hazard in insurenace context


Literature: [* relatively explicitly "geographic"]

Search: LegalTrac (Bibliographic Data Base


Alchian, Armen A. and Susan Woodward, The Firm is Dead; Long Live the Firm: A Review of Oliver E. Wiliamson's The Economic Institutions of Capitalism, Journ. of Economic Literature 26 (1), March 1988, 65-79.

Alchian, Armen, and Harold Demsetz, (1972) "Production, Information Costs, and Economic Organization," American Economic Review, 62, 777-795.

Aoki, Masahiko, Bo Gustafsson, and Oliver E. Williamson (eds.), (1990) The Firm as a Nexus of Treaties, Swedish Collegium for Advanced Study in the Social Sciences series, Newbury Park, CA: Sage.

*Casson, Mark, "The Role of Vertical Integration in the Shipping Industry," Journal of Transport Economics and Policy. xx(1), Jan.1986, 7-29.

Cheung, Stephen N.S., (1983) "The Contractual Nature of the Firm," Journal of Law and Economics, 26(1), 1-21.

Coase, Ronald H., (1937) "The Nature of the Firm," Economica, 4(n.s.), 1937, 386-405. Reprinted in R.H. Coase, (1988) The Firm, the Market, and the Law, Chicago: University of Chicago Press, 33-55.

Coase, Ronald H., (1988) "The Nature of the Firm: Origin, Meaning, Influence" Journal of Law, Economics, and Organization, 4(1), 3-47.

Coase, Ronald H., (1988) The Firm, the Market, and the Law, Chicago: University of Chicago Press.

Coase, Ronald H., (1994) Essays on Economics and Economists, Chicago: University of Chicago Press.

Demsetz, Harold, (1968) "The Cost of Transacting," Quarterly Journal of Economics, 82, 33-53.

Dixit, Avinash K. The making of economic policy : a transaction-cost politics perspective. Cambridge, Mass : MIT Press, 1996. Munich lectures in economics. Suzzallo [HD87 .D59 1996]

Dosi, Giovanni and Roberta Salvatore, "The Structure of Industrial Production and the Boundaries between Firms and Markets," in: Storper and Scott, eds., 1992, pp. 171ff.

Furubotn, Eirik G., and Rudolf Richter, (1991) "The New Institutional Economics: An Assessment," in Eirik G. Furubotn and Rudolf Richter (eds.), The New Institutional Economics: A Collection of Articles from the Journal of Institutional and Theoretical Economics, Tubingen: Mohr (Siebeck), 1-32.

Gabre-Madhin, Eleni Z. Market Institutions, Transaction Costs, and Social Capital in the Ethiopian Grain Market. International Food Policy Research Institute: Research Report 124 2001 .

Ghoshal. Sumantra and Peter Moran, Bad for Practice: A Critique of the Transaction Cost Theory, Academy of Management Review 21(1), 1996, 13-47. [followed by response by Williamson, pp.48-57 and a rejoinder by the authors, pp.58ff.]

Granovetter, Mark, (1985) "Economic Action and Social Structure: The Problem of Embeddedness," American Journal of Sociology, 91, 481-510.

Greif, Avner, (1993) "Contract Enforcement and Economic Institutions in Early Trade: the Maghribi Traders' Coalition," American Economic Review, 83(3), 525-548.

Holmström, Bengt, and Paul Milgrom, (1989) "The Firm as an Incentive System," American Economic Review, 84(4), 972-991.

Holmström, Bengt and John Roberts. "The Boundaries of the Firm Revisited," Journal of Economic Perspectives 12(4), Fall 1998, pp.73-94.

Leffler, Keith B., Randal R. Rucker, Ian A. Munn. Transaction costs and the collection of information: presale measurement on private timber sales. (Statistical Data Included) Journal of Law, Economics, & Organization April 2000 v16 i1 p166-188

Leffler, Keith B., and Randal R. Rucker, (1991) "Transaction Costs and the Efficient Organization of Production: A Study of Timber-Harvesting Contracts," Journal of Political Economy, 99(5), 1060-1087. [Transaction cost framework is used to explain the choice between lump-sum and per unit payment provisions in private timber-harvesting contracts.]

*Maltz, Arnold. "Private Fleet Use: A Transaction Cost Model," Transportation Journal, Spring 1993, pp.46ff.

Medema, Steven G., Coasian Economics: Law and Economics and the New Institutional Economics. Boston: Dordrecht; London: Kluwer, 1998. [Brief Abstract in JEL, June 1998, p. 1013].

North, Douglass C., (1981) Structure and Change in Economic History, New York: W.W. Norton and Company.

North, Douglass C., and Barry R. Weingast, (1989) "Constitutions and Commitment: The Evolution of Institutions Governing Public Choice in Seventeenth-Century England," Journal of Economic History, 49(4), 803-832.

North, Douglass C., (1990) Institutions, Institutional Change, and Economic Performance, New York: Cambridge University Press.

Ouchi, William G., (1980) "Markets, Bureaucracies, and Clans," Administrative Science Quarterly, 25(March), 129-141.

Pitelis, Christos. Transaction costs, markets and hierarchies / edited by Oxford, UK ; Cambridge, Mass. : Blackwell, 1993. vi, 280 p. : ill. ; 24 cm. Includes bibliographical references and index. Transaction-costs. Institutional-economics. [Foster Business Library General Stacks HB846.3 .S87 1993]

Nature and role of the market -- In the beginning there were markets? -- Control, markets and firms -- Transaction costs and the evolution of the firm -- Appropriability critique of transaction cost economics -- Power and efficiency in the firm -- Transaction costs...and revenues -- Transaction cost economics and the state -- Markets, hierarchies and markets again -- Markets, false hierarchies and the role of asset specificity -- On transactions (costs) and markets and (as) hierarchies.

Pollak, Robert A., A Transaction Cost Approach to Families and Households, Journ. of Econ. Lit. 23 (2), June 1985, pp.581ff.

Rindfleisch, Aric, and Jan B. Heide, (1997) "Transaction Cost Analysis: Past, Present, and Future Applications," Journal of Marketing, 61(October), 30-54. [Over the past decade, transaction cost analysis (TCA) has received considerable attention in the marketing literature.]

Swygert, Michael I. and Katherine Earle Yanes. A primer on the Coase theorem: making law in a world of zero transaction costs. Mark DePaul Business Law Journal, Fall-Winter 1998 v11 i1 p1-42

*Wancura, Dan N., A transaction cost approach to integrated freight transportation. 1989. Thesis (M.A., Geography)--University of Washington, 1989. Includes bibliographical references (leaves [128]-132). Freight-and-freightage. Shipment-of-goods. Integrated freight transportation. Suzzallo General Stacks [G 59 Th37039]

Williamson, Oliver E., (1975) Markets and Hierarchies: Analysis and Antitrust Implications, New York: The Free Press.

Williamson, Oliver E., The Economics of Organization: The Transaction Cost Approach American Journal of Sociology, Vol. 87, No. 3. (Nov., 1981), pp. 548-577. [particularly: pp.555-62]

Williamson, Oliver E., (1983) "Credible Commitments: Using Hostages to Support Exchange," American Economic Review, 73(4), 519-540.

Williamson, Oliver E., (1985) The Economic Institutions of Capitalism, New York: The Free Press. [Reviewed by Alchian & Woodward, JEL 1988, see above]

Williamson, Oliver E., (1993) "Transaction Cost Economics Meets Posnerian Law and Economics," Journal of Institutional and Theoretical Economics, 149(1), 99-118.

Williamson, Oliver E., and Sidney G. Winters (eds.) (1993) The Nature of the Firm: Origins, Evolution, and Development, New York: Oxford University Press.


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