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Transaction Costs Theory And The Imperfect Markets

1429 words - 6 pages

Transaction costs theory and the imperfect markets.

Williamson’s successful complementation of the Coases approach of the firm as an
alternative to reduce the cost of using the price mechanism, with Herbert Simon’s
organizational theory, gave birth to the Transaction Costs Theory (TCT)1. This meant a
big step, which evolved the theory of the firm, from its obsolete neoclassical toots and
assumptions -of a perfect competitive market and a perfect rationality-, by adding the
issues of bounded rationality and opportunism to Coases work2. Williamson opened the
path to new ways of conceiving and complementing the theory of the firm in general,
and the transactions costs theory in ...view middle of the document...

As Walras once said, under the neoclassical view, the transaction cost due to the
asymmetries of information, would be to the market, like a friction to a machine. And
“The most obvious sort of friction, and undoubtedly one of the most important, is the
cost of transferring assets from one form to another” as John Hicks once said6. In
1940, Tibor Scitovsky introduced the label of “transaction costs” into the economic
vocabulary7. And in 1937 Ronald Coase published his paper in which he attributed the
existence of the firm as a way to lower the cost of using the price mechanism 8 ,
considering the firm and the market to be alternative methods of coordinating resource
allocation. Coase argued that the cost of using the market price mechanisms could be
reduced if agents internalized activities, so the entrepreneur becomes consequently an
administrator, who directs and supervises the required activities, in order for the firm to



allow agents to economize their market costs9.
In 1979 Oliver Williamson’s article “Transaction cost economics: the governance of
contractual relations” appears in the Journal of Law and Economics, in it, he opens the
way to the study of economic activity as undertaken by agents characterized by limited
cognitive capacity, and opportunistic behaviour 10 . In this way he continues the
departure from the perfect rationality assumptions initiated in the fifties by Herbert
Simon, who with the insights from cognitive psychology –that is the notion that men
can be “intentionally rational, but only to a limited extent” 11 - gave birth to the
organizational theory. Williamson then uses Simon’s organizational theory assumptions
and combines it with the analytical framework of neoclassical economics12, translating
the ideas from organization literature, into concepts observable in the performance of
firms and markets, in order to explain that the reasons for vertical integration lie in the
behavioural characteristic of contracting actors, and particularly in bounded rationality.
Then and as a consequence of the development of the former insights, he develops
the theoretical foundations incomplete contracts, opportunism and merges them with
the neoclassical cost minimization into this conceptual framework13.
According to Williamsons work, there are three general dimensions, along which

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