1. DJ, 2003 Theories of the Firm Transaction Cost

2. DJ, 2003 Introduction z Coase – on the nature of the firm y Firms exist to minimise transaction costs z Transaction costs are the costs incurred in y establishing ownership, locating trading partners, carrying out transaction – changing ownership

3. DJ, 2003 Institutions z Institutions ≠ Organisations z Institutions involve recurrent patterns of behaviour – habits, conventions, routines z Organisations are structures of people as in a firm or administrative department, with common concerns or objectives

4. DJ, 2003 Make or Buy z TC theory tries to explain the choice between “make” and “buy” z “Make” where the TCs are too high; “buy” where they are low z Where TCs are higher, total production is lower because of loss of gains from specialisation

5. DJ, 2003 Firms or Markets z Make or buy is a choice between firms and markets z Make ⇨ firm; buy ⇨ market z So, TC is an institutional theory; it involves a choice of institutions

6. DJ, 2003 Williamson z New Institutionalist z Economics as contracts z Bounded rationality – imperfect ability to solve complex problems z Opportunism – exploiting a weakness that arises in other party to contract (e.g. loophole) z Asset specificity – extent to which the asset (investment) is peculiar to that transaction

7. DJ, 2003 BR, O and AS z BR, O and AS influence choice, make or buy z Where there is BR, there can be O; where there is O, there is little trust; the result is make rather than buy z Greater AS also leads to internalisation – internal rather than market governance

8. DJ, 2003 Critique z Alchian and Demsetz, technological non- seperability – the firm exists to monitor, measure and allocate the benefits of team performance z TC does not incorporate role of firm in acquisition of knowledge z Lazonick – TC is theory of adaptive, not innovative firm z TC cannot, e.g., explain internal, incremental change in firms