The Economics of Organization: The Transaction Cost Approach
Transaction cost approach is an inter-disciplinary approach to organizations that combine economics, sociology and law. Transaction cost, economic counterpart to friction, occurs when good or service cannot be transferred between parties easily. Transaction cost is illustrated by dilemma: is it cheaper to make components yourself or buy them from market? Transaction cost arise from the fact that humans are computationally limited while motivationally complex. Transaction cost can be dimensionalized on uncertainty, frequency and asset specificity. These dimensions can be used to explain different organizational structures.Yellow highlights/annotations are my own. You can disable them.
Summary and Case Study
Note that I use the word governance cost in place of transaction cost in the summary below as it is more illuminating in the context of the case study that follows.
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