ABSTRACT
Transaction cost economics (TCE) is the dominant theory used to analyse the economics of inter-fi rm relationships. TCE’s key predictions are that: 1) fi rm boundaries are the outcome of managerial decisions to lower the cost of doing business; and 2) fi rms use organisational design, governance, and management control choices to mitigate exchange hazards and to enhance transaction effi ciency.1 Exchange hazards arise between self-interested, profi t-maximising transaction partners as a result of information asymmetry and uncertainty. When information asymmetry or uncertainty is present, it is too costly (or impossible) to write complete contracts that specify responses to all contingencies. As a result, transaction partners are exposed to the risk that a partner will behave opportunistically, exploiting private knowledge or the resolution of uncertainty at some future date to enhance their position at the expense of their trading partner. Researchers use TCE theory for a variety of purposes, such as:
identifying transaction characteristics (i.e., asset specifi city, environ-• mental uncertainty, measurement uncertainty, transaction frequency) that are associated with exchange hazards; explaining why fi rms employ close inter-fi rm relationships that are • subject to exchange hazards instead of using other approaches (e.g., arm’s-length market transactions, vertical integration of activities by the fi rm); and testing the contingency proposition that better performance outcomes • for transactions are realised when specifi c approaches to governance and management control are aligned with transaction hazards.
