Transaction Cost Economics: How it Works; Where it is Headed

Abstract

This paper begins with a sketch of the New Institutional Economics, with special emphasis on the "institutional environment" (North and others) and the "institutions of governance" (Coase and others). Thereafter the paper mainly emphasizes the applications of transaction cost economics to the study of governance, the object being to effect an economizing alignment between transactions, which differ in their cost and competence. I raise a series of issues -- phenomena of interest, describing human agents, describing firms, purposes served, scaling up -- to which any would-be theory of the firm should be expected to speak and indicate how transaction cost economics responds to each. I thereafter describe the mechanisms through which transaction cost economics is implemented and envelop some of the core conceptual supports out of which it works. Applications to public bureaus, strategic management, and intractable transactions are sketched.