Transaction Cost Economics and Stakeholder Theory

by

Mikko Ketokivi, Joseph Mahoney

• LAST MODIFIED: 07 January 2025
• DOI: 10.1093/obo/9780199846740-0228

Introduction

Transaction cost economics (TCE) combines the intellectual foundations of law, economics, and organization theory to address the governance of contractual relationships and economic transactions. TCE seeks to identify governance structures where the value-creating skills and resources are put to comparatively better uses—in short, economic efficiency by avoiding waste. How the final assembler of automobiles should organize its relationships with its component suppliers is a representative example of TCE’s domain of application. In automobile assembly, the question of which components to make internally and which to buy from external suppliers—the make-or-buy decision—is an illustrative research question. As the illustration shows, TCE takes the exchange relationship, or transaction, as its central unit of analysis. Viewed through a stakeholder lens, TCE focuses on complex, long-term contractual relationships beset with bilateral dependency, high environmental uncertainty, and behavioral risk. In the context of buyer-supplier relationships in the automotive value chain, a long-term relationship that involves various relation-specific investments is an example of such a complex relationship. For example, a seat manufacturer might geographically collocate its seat assembly plant with the automaker’s final assembly plant to supply seats efficiently for final assembly. Stakeholder relationships emerge as the contracting parties become bilaterally dependent. TCE’s logic suggests that enfranchised stakeholder relationships be adequately safeguarded by implementing the appropriate governance structures. Even though TCE initially focused on topics such as vertical integration and buyer-supplier relationships, the TCE approach to governance applies generally to any intra- or inter-organizational issue that can be framed as a contracting problem. The objective of this article is to offer a summary of the six central TCE-based research programs that are intimately related to stakeholder governance. The number of representative contributions under each research program has been limited to a maximum of ten texts (i.e., articles, books, or book chapters). Given that since the inception of TCE scholarship in the 1960s, several hundred scholars across the world have contributed several thousand articles to TCE’s research programs, the contributions in this review are unavoidably selective and illustrative, and not comprehensive.

General Overviews

The seminal transaction cost economics (TCE) contributions consist of three books by TCE’s main architect Oliver Williamson: Williamson 1975, Williamson 1985, and Williamson 1996. Cuypers, et al. 2021 offers a systematic overview of TCE’s empirical research contributions. Ketokivi and Mahoney 2023 provides a practitioner-oriented exposition.

• Cuypers, I. R. P., J-F. Hennart, B. S. Silverman, and G. Ertug. “Transaction Cost Theory: Past Progress, Current Challenges, and Suggestions for the Future.” Academy of Management Annals 15.1 (2021): 111–150.

  DOI: 10.5465/annals.2019.0051

  A detailed, state-of-the art review of TCE (also known as transaction cost theory, TCT), with an extensive list of literature references. The article takes stock of TCE-based research and offers potential opportunities for future research.

• Ketokivi, M., and J. T. Mahoney. Efficient Organization: A Governance Approach. Oxford: Oxford University Press, 2023.

  DOI: 10.1093/oso/9780197610282.001.0001

  A practitioner-oriented book that applies TCE’s logic to practical governance decisions in the context of startups, growing organizations, and established organizations. Contains a chapter on how TCE can provide a foundation for a stakeholder analysis.

• Williamson, O. E. Markets and Hierarchies: Analysis and Antitrust Implications. New York: Free Press, 1975.

  An early contribution to TCE, focusing on the organization of economic activities and the origins and functions of various governance structures. The main question is, “Why are economic activities organized the way they are?” Williamson further focuses specifically on how firms and markets may fail to organize economic activities. To this end, Williamson offers an organizational failures framework and examines its implications for issues such as vertical contracting, vertical integration, organizational structure (multidivisional firms, conglomerates), and market structure (monopolies, oligopolies).

• Williamson, O. E. The Economic Institutions of Capitalism: Firms, Markets, Relational Contracting. New York: Free Press, 1985.

  The central theoretical contribution to TCE. Discusses TCE’s theoretical logic, underpinning assumptions, and objectives. Provides numerous illustrations of TCE’s applicability in complex contracting situations, such as business history, corporate governance, labor relations, natural monopolies, and antitrust enforcement.

• Williamson, O. E. The Mechanisms of Governance. New York: Oxford University Press, 1996.

  DOI: 10.1093/oso/9780195078244.001.0001

  This collection of Williamson’s central contributions to TCE contains fourteen chapters on various TCE-related topics. Also offers TCE’s central concepts, such as incomplete contracting in its entirety, credible commitments, legal centralism vis-à-vis private ordering, the fundamental transformation, the impossibility of selective intervention, remediableness, and the contradiction in terms of calculative trust, among others.