Organizational Economics: Notes on the Use of Transaction-Cost Theory in the Study of Organizations

I would like to thank Richard Daft, Scott Edmundson, Gareth Jones, Michael Masuch, and the anonymous ASQ reviewers for insightful comments on earlier drafts of this paper. The ideas presented in it also owe a great deal to discussion and debate among members of the Organization and Strategic Studies group of the UCLA Graduate School of Management, including (among others) Jay Barney, William Ouchi, and Richard Rumelt. None of these individuals bears any responsibility for errors or idiosyncratic opinions that remain in the paper. An earlier version was presented at the Academy of Management Annual Meeting in 1985. Transaction-cost theory has helped to give new life to some of the classic issues of organization studies through the use of microeconomic models. However, the assumptions underlying these models have not been examined carefully, and this has produced serious logical and empirical weaknesses in recent works. This paper reviews transaction-cost approaches to organizational analysis, examines their use of microeconomic theory, and identifies some important flaws in the work. It concludes by arguing that transactioncost theory can be a powerful tool for organizational and strategic analysis but that it must be set within the framework of more general organization theory.