Transaction cost economics. Ronald Coase set out his transaction cost theory of the firm in 1937, making it one of the first (neo-classical) attempts to define the firm theoretically in relation to the market.

The first 200 words of this essay...

MANAGERIAL ECONOMICS

COURSE ASSESSMENT 1

PREPARED BY MS. KWOK NA, CLARA

STUDENT NUMBER: 8221037

ASSIGNMENT REFERENCE: ME/JULY11/1

BACKGROUND

According to Ronald Coase, people begin to organize their production in firms when the transaction cost of coordinating production through the market exchange, given imperfect information, is greater than within the firm.1 Ronald Coase set out his transaction cost theory of the firm in 1937, making it one of the first (neo-classical) attempts to define the firm theoretically in relation to the market. One aspect of its 'neoclassicism' lies in presenting an explanation of the firm consistent with constant returns to scale, rather than relying on increasing returns to scale.2

Transaction cost economics (TCE), and more specifically the version of TCE that has been developed by Oliver Williamson (1975, 1985, 1993b), has become an increasingly important anchor for the analysis of a wide range of strategic and organizational issues of considerable importance to firms.

Characteristics of TCE

Contracting problem

Although transaction cost economics maintains that all complex contracts are unavoidably incomplete by reason of bounded rationality, such incompleteness should not be confused with myopia. On the contrary, transaction cost economics maintains