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TRANSACTION COST ANALYSIS: ORIGINS AND OVERVIEW

Transaction cost analysis belongs to the "New Institutional Economics"

paradigm, which, over time, has supplanted traditional neoclassical economics.
Although neoclassical economics has largely ignored the concept of the firm by
viewing it strictly as a production function (Barney and Hesterly 1996), TCA
explicitly views the firm as a governance structure. One of Coase's (1937) initial
propositions was that firms and markets are alternative governance structures
that differ in their transaction costs. Specifically, Coase proposes that under
certain conditions, the costs of conducting economic exchange in a market
may exceed the costs of organizing the exchange within a firm. In this context,
transaction costs are the "costs of running the system" and include such ex ante
costs as drafting and negotiating contracts and such ex post costs as
monitoring and enforcing agreements.

Over the past two decades, Williamson (1975, 1985, 1996) has added
considerable precision to Coase's general argument by identifying the types
of exchanges that are more appropriately conducted within firm boundaries
than within the market. He also has augmented Coase's initial framework by
suggesting that transaction costs include both the direct costs of managing
relationships and the possible opportunity costs of making inferior governance
decisions. Williamson's microanalytical framework rests on the interplay
between two main assumptions of human behavior (i.e., bounded rationality
and opportunism) and two key dimensions of transactions (i.e., asset specificity
and uncertainty). We next provide a brief description of the interaction between
these behavioral assumptions and transaction dimensions.

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 Assumptions and Dimensions of Transaction Cost Analysis

Bounded rationality is the assumption that decision makers have constraints

on their cognitive capabilities and limits on their rationality. Although decision
makers often intend to act rationally, this intention may be circumscribed by their
limited information processing and communication ability (Simon 1957). According
to TCA, these constraints become problematic in uncertain environments, in which
the circumstances surrounding an exchange cannot be specified ex ante (i.e.,
environmental uncertainty) and performance cannot be easily verified ex post
(i.e., behavioral uncertainty).

The primary consequence of environmental uncertainty is an adaptation

problem, that is, difficulties with modifying agreements to changing
circumstances. For example, a manufacturer that, because of competitive
entry, must modify the design of its product also may need to modify the design of
the purchased components that constitute the end product. Unless a
comprehensive contract can be written with its supplier, which specifies in
advance the required component designs and the associated terms of trade,
the manufacturer may need to assume the considerable transaction costs
associated with ongoing renegotiations.

The effect of behavioral uncertainty is a performance evaluation problem,

that is, difficulties in verifying whether compliance with established agreements has
occurred. For example, a manufacturer may have difficulty ascertaining whether a
distributor is providing customers with necessary presales services. Alternatively,
even if the relevant aspects of a distributor's operations can be measured, the
information gathering and processing costs incurred by the manufacturer may be
substantial.

Opportunism is the assumption that, given the opportunity, decision makers

may unscrupulously seek to serve their self-interests, and that it is difficult to know
a priori who is trustworthy and who is not (Barney 1990). Williamson (1985, p. 47)
defines opportunism as "self-interest seeking with guile," and suggests that it
includes such behaviors as lying and cheating, as well as more subtle forms
of deceit, such as violating agreements. Opportunism poses a problem to the
extent that a relationship is supported by specific assets whose values are

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limited outside of the focal relationship. For example, a manufacturer that invests in
training a distributor may subsequently have difficulty replacing the distributor
with a new one. The incumbent distributor can exploit the situation opportunistically
by demanding various kinds of concessions from the manufacturer. Essentially, the
effect of specific assets is to create a safeguarding problem, because market
competition no longer serves as a restraint on opportunism.

In addition to the key assumptions and dimensions previously outlined,

the complete TCA framework also includes risk neutrality as a third behavioral
assumption and transaction frequency as a third transactional dimension. Both of
these constructs are specified by Williamson (1975, 1985) but have received limited
attention in the TCA literature. Chiles and McMackin (1996) provide a theoretical
discussion of the validity of TCA's assumption of risk neutrality, but there are no
empirical investigations of this assumption. To date, only a few TCA studies
explicitly address transaction frequency. According to Williamson (1985, p. 60),
higher levels of transaction frequency provide an incentive for firms to employ
hierarchical governance, because "the cost of specialized governance
structures will be easier to recover for large transactions of a recurring
kind." Because of the limited attention that previous research has given to
both the assumption of risk neutrality and the dimension of transaction
frequency, our review does not address these parts of the TCA framework.

The Logic of Transaction Cost Analysis

The basic premise of TCA is that if adaptation, performance evaluation,

and safeguarding costs are absent or low, economic actors will favor market
governance. If these costs are high enough to exceed the production cost
advantages of the market, firms will favor internal organization. The logic
behind this argument is based on certain a priori assumptions about the
properties of internal organization and its ability to minimize transaction
costs. Three specific aspects of organizations are relevant in this respect. First,
organizations have more powerful control and monitoring mechanisms
available than do markets because of their ability to measure and reward
behavior as well as output (Eisenhardt 1985; Oliver and Anderson 1987). As a
result, the firm's ability to detect opportunism and facilitate adaptation is enhanced.

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Second, organizations are able to provide rewards that are long term in nature, such
as promotion opportunities. The effect of such rewards is to reduce the payoff from
opportunistic behavior. Third, Williamson (1975) acknowledges the possible effects
of the organizational atmosphere, in which organizational culture and socialization
processes may create convergent goals between parties and reduce opportunism ex
ante.

Although TCA's original framework poses the governance question as a

discrete choice between market exchange and internal organization, the current
version of the theory explicitly acknowledges that features of internal organization
can be achieved without ownership or complete vertical integration. A variety of
hybrid mechanisms have been identified in the literature, ranging from formal
mechanisms, such as contractual provisions and equity arrangements (Joskow
1987; Osborn and Baughn 1990), to more informal mechanisms, such as
information sharing and joint planning (Noordewier, John, and Nevin 1990, Palay
1984).

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HAMZAH NOR SIHAB

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PHARAFRASE

Transaction cost analysis is a new economic institutional pattern that shifts the neoclassical
economy. (Barney and Hesterly 1996) In neoclassical economies ignoring the production
function, explicitly views companies as a governance structure. (Coase 1937) under certain
conditions the costs of exchanging the economy in the market exceed the costs arrange
exchanges within the company

(Williamson 1975, 1985, 1996) adds a general argument to Coase by identifying the types of
exchanges that are more appropriate within company boundaries than in the market and
suggests that transaction costs include direct costs of managing relationships and possible
opportunity costs for making lower governance decisions .Illiamson adds a micro-analysis
framework focusing on the interaction between two main assumptions of human behavior (ie,
rationality and bound opportunism) and two key dimensions of transactions (ie, asset
specificity and uncertainty).

Assumptions and Dimensions of Transaction Cost Analysis

Decision makers often try to act rationally but are hampered due to lack of ability to process
information and limited communication. This often occurs in an uncertain environment,
cannot be predicted in the future (Ex-ante) or evaluated (Ex-post)

the result of uncertain environmental conditions is the difficulty of modifying agreements to

change circumstances. For example, due to competition requires changing products and
designs that may require large costs for negotiations with suppliers to rearrange

the result of uncertainty in behavior is the degree of success of the work compliance
agreement made, such as whether the distributor has provided presales services to the
customer.

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Opportunism itself is seeking profit for yourself, cheating, and deceptively subtly.
Like breaking an agreement.

The TCA framework includes risk neutrality as a third behavioral assumption and
transaction frequency as the third transactional dimension.2 This construction is
described in Williamson but does not receive much attention, then Chiles and
McMackin provide a theoretical discussion but no empirical evidence. the high level
of transaction frequency gives a company impetus to implement hierarchical
governance, because "the cost of a special governance structure is easier to recover
for large types of recurring transactions. Because the attention that can be obtained
in research is limited then it is not discussed again.

The Logic of Transaction Cost Analysis

TCA's basic assumption that adaptation, evaluation and protection costs are low,
economic actors will support market governance, but if it is high enough to exceed
production costs, the company supports internal organization. This statement is
based on the nature of the internal organization and the ability to minimize
transaction costs. 3 aspects, First, the organization has strong controls and
monitoring mechanisms available so that the company's ability to detect opportunism
and facilitate adaptation increases.

Second, the organization provides long-term rewards, such as promotional

opportunities to reduce the nature of opportunism. Third, know the effects that will
occur in the company / organization environment, where the organizational culture
and socialization process can create convergent goals between the parties and
reduce opportunism for future predictions. front / ex ante

The original TCA framework lays out around the question of governance as a
separate choice between market exchange and internal organizations.

This TCA theory explicitly explains the features of internal organization that can be
achieved without ownership or complete vertical integration. The following are
mechanisms of incorporation mechanisms that have been identified in both sources
and readings, ranging from formal mechanisms, such as contract provisions and
equity arrangements to more informal mechanisms, such as information sharing and
joint planning