Transaction cost theory (Ronald, Coase and Williamson)

The transaction cost theory was built in several stages. It rests, in its current developments, on certain hypotheses different from neo-classical axiomatics, mainly a hypothesis of different rationality.

The notion of transaction cost was introduced for the first time by Ronald Coase in 1937. It would not arouse any comment for many years, before earning its author belated fame (Nobel Prize). It is thanks to the work of Williamson that the notion of transaction cost takes on its full scope.

Thanks to this concept, the theory of transaction costs is able to account for the existence of the firm in a market economy. In addition, it helps to understand the forms of transaction governance. Thus, it makes it possible to study organizational forms.

We will therefore present the pioneering work of Coase at the basis of this theory. then, we will present the work of O.E. Williamson which constitute, strictly speaking, the theory of transaction costs.

Definition of transaction cost

A transaction cost is a cost associated with an economic exchange, specifically a market transaction. This cost does not exist under pure and perfect competition. It can be direct (stock market commission) or indirect (prospecting cost, time and effort spent negotiating and verifying the transaction, etc.).

Ronald Coase and the question of the existence of the firm

Ronald Coase with the theory of transaction costs, questions the market as an optimal mode of adjustment and opposes market structures to corporate structures. He was the first to base the legitimacy of the company on its ability to carry out transactions internally in a more economical way than through the market by showing that going through the market entailed transaction costs (analysis, negotiation , drafting of contracts and verification of their execution, etc.).

The idea put forward is that firms exist because the exchanges carried out on the markets are more expensive than when they are managed within organizations. The company that brings together a group of people through a set of contracts to perform tasks without resorting to the market avoids transaction costs.

Olivier Williamson and the definition of transaction cost

As an extension of the work of R.Coase in 1970, Williamson deepens the approach by relying on the concept of limited rationality of Herbert Simon.

It is admitted that the theory of transaction costs is a function of the degree of complexity and uncertainty of the environment and that the agents are only endowed with a “bounded rationality”. could arise within the framework of the execution of a contract, this state of affairs, a factor of uncertainty, entails transaction costs and an incompleteness of the contract.

If contracts cannot anticipate all situations, they risk offering “opportunistic” behavior that can divert the spirit of the contract in favor of one of the parties.

As any economic transaction generates transaction costs prior to its realization, the efficient company will be the one that minimizes them.

Williamson distinguished between specific transaction costs and non-specific transaction costs. Specific costs relate to specific transactions between specific partners, while non-specific costs are more general and can be applied to different transactions. He also developed the concept of “cooperation through control”, showing how companies internalize transactions to exercise more effective control.

Conclusion: Impact and Relevance

The transaction cost theory of Ronald Coase and Oliver Williamson had a significant impact on economics and management. It provided conceptual tools to understand the advantages and disadvantages of transactions in markets and within organizations. This theory has been widely used to explain governance choices, mergers and acquisitions, contracts, and verticalization or disintegration decisions.

Ultimately, transaction cost theory shed light on the complexity of economic decisions by highlighting the hidden costs associated with trade. This perspective has strengthened our understanding of the organizational structures and motivations underlying economic choices.

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