ABSTRACT

This chapter discusses the relation between core assumptions and mechanismic explanations. It explains two ways of theory testing − assumption omitted and assumption based, and recommends that when a new theory is initially tested, the latter should play a more important role than the former. "In order for unrealistic psychological and social assumptions to be acceptable, they must be simplifying idealizations that help the modeling but do not affect the central explanatory relationships in any crucial manner". The use of heuristic assumptions is also evident in the development of theories in the social sciences. The chapter also examines the transaction-cost-economizing assumption of transaction cost economics (TCE), the testing of which is crucial for establishing that managerial choice, rather than natural selection, is the key force behind the governance structures observed in the empirical domain. The history of empirical research in TCE illustrates how the dominance of assumption-omitted theory testing has slowed down theory development.