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In interfirm exchanges, transaction cost economics (TCE) argues that asset specificity, critical for value creation, poses hazards requiring contractual safeguards. TCE assumes actors have foresight to mitigate these hazards even though specificity is typically hard to observe, suggesting that managers' impressions may be biased. Taking a microfoundational approach, we explore how individual negotiators form perceptions of optimal asset specificity and aggregate them to a firm-level assessment that may be influenced through negotiation. We then explore how managers may actively manipulate their counterparts' perceptions to maximize their firm's value capture. We theorize about when this may occur and the implications for contractual governance, value creation and capture, and repeated exchanges—each of which may vary from extant predictions. By symmetrically applying an expanded bounded rationality assumption (including cognitive distortions) and net value capture motivation, we augment contract design research by enabling prediction of when and how managers' strategic behavior may impact exchange outcomes. As a result, this analysis provides a more nuanced understanding of when contract design may intentionally deviate from efficient governance predictions. [ABSTRACT FROM AUTHOR]

Transaction cost economics (TCE) carefully analyzes market failure while remaining largely silent about hierarchical failure. We argue that this omission occurs because TCE's opportunism assumption does not consider organizational member motivations under different hierarchical forms. Thus, TCE does not fully examine opportunistic behavior under hierarchy, resulting in an incomplete governance analysis. To fill this gap, we build a discriminating alignment theory of hierarchical choice that incorporates explicit motivations under each hierarchical form. We make three contributions to TCE with this theory. First, using the counterproductive work behavior and goal-framing literatures, we predict specific motivations (effort, visceral, financial or status opportunism, or collaboration) across hierarchical forms. Second, we predict when "efficient" hierarchical forms (mapped from Williamson's internal governance analysis) do not effectively mitigate opportunistic behavior, creating hierarchical failure. In these cases, we augment the hierarchical forms with supplemental governance mechanisms necessary to efficiently govern the exchange. Finally, we investigate how different motivations across hierarchical forms lead to excess misalignment costs to enhance our understanding of hierarchical failures. Examining how both transaction hazards and specific motivations drive particular behaviors allows for a more nuanced understanding of specific "costs and competencies" of hierarchy and, in turn, hierarchical failure in TCE. [ABSTRACT FROM AUTHOR]

We integrate the governance and measurement branches in transaction cost economics to highlight how differences in performance measurement choices influence the governance of strategic assets, thereby affecting transaction costs. We develop our theory in the context of corporate governance in firms. Financiers of debt and equity employ market and hierarchical governance to safeguard generic and specific assets, respectively. Financial reporting choices constitute credible commitments to generate performance reports that are used by financiers in exercising governance. We explain why conservatism (more timely information about potential losses) bolsters the market governance of debt to reduce transaction costs for generic assets, while smoothing (informative reports about future earnings) strengthens the hierarchical governance of equity to reduce transaction costs for specific assets. We outline a research agenda incorporating the implications of performance measurement from financial reporting choices for the governance of strategic investments. [ABSTRACT FROM AUTHOR]

We augment transaction cost economics' bounded rationality assumption with heuristics (framing) and cognitive biases to expand the understanding of hierarchical governance in the theory. In transaction cost economics opportunism traditionally takes the front seat, while bounded rationality is primarily relegated to the support role of invoking incomplete contracts. The theory also suggests that hierarchical governance effectively mitigates opportunism-based transaction costs, making it difficult to explain why hierarchies are not always used. However, when an augmented bounded rationality assumption is incorporated into transaction cost economics, we argue, first, that bounded rationality is a separate source of transaction costs and, second, that these costs are not equally mitigated by all forms of hierarchy. Instead, different hierarchical forms are associated with particular frames and social referents that naturally enhance specific bounded rationality-based conflicts, allowing certain hierarchical forms to mitigate bounded rationality-based transaction costs better than others. As a result, bounded rationality takes a front seat in the theory, addressing prior critiques of the theory, expanding the governance questions addressed by the theory, and creating a new moderating role for asset specificity in internal exchanges. [ABSTRACT FROM AUTHOR]

A response from the authors of the article "Transaction cost economics and the cognitive perspective: Investigating the sources and governance of interpretive uncertainty” in Volume 39 from 2015 is presented.

The author discusses the role of conflicting cognitive frames in transaction cost economics as examined by professors L. Weber and K. Mayer in the publication's prior article titled "Transaction cost economics and the cognitive perspective: Investigating the sources and governance of interpretive uncertainty." The author argues that Weber and Mayer's framework is best applied to multicultural, diplomatic, multiparty, and non-routine contexts, and discusses the incentives for parties involved in routine transactions for implementing context-based mechanisms to avoid costly conflicts or renegotiations as discussed by O. E. Williamson.

The philosophy of science offers two different perspectives on how empirical findings contribute to knowledge accumulation. The "law-statement" perspective interprets contributions to the extent that empirical research confirms or refutes general axioms of theory. Alternatively, the "model-theoretic" perspective recognizes contributions from models that improve scholars' ability to represent the world of managers. Management scholars often have limited awareness of the philosophical tradition underlying the model-theoretic perspective, and, consequently, useful contributions from improved models of important phenomena may be overlooked. Drawing on model-theoretic philosophy, we identify three ways in which empirical research contributes to theoretical knowledge without necessarily verifying or falsifying theoretical axioms, through the grafting, contextualizing, and repurposing of representational models. We provide examples of each by focusing on studies investigating incentive alignment. Finally, we discuss how the model-theoretic perspective contributes to an ongoing discussion about improving theoretical precision in management research. [ABSTRACT FROM AUTHOR]

We analyze how transaction cost economics and competence arguments determine vertical organization boundaries when firms react to innovation. Existing perspectives and empirical evidence have been ambiguous because of conflicting tensions between the two frameworks and simplistic views of innovation. Using Henderson and Clark's (1990) innovation categories and a careful review of both theories, we show that it is possible to reach a consistent set of predictions on vertical integration and to reconcile apparently conflicting empirical results. [ABSTRACT FROM AUTHOR]

The article discusses a conceptual framework for evaluating interdependence in inter-organizational and intra-organizational relations. The method includes: a referent system common to both relational contexts; six dimensions that define interdependence; and five variables that influence the perception of interdependence. Interdependence occurs when the action of one unit affects the action or work outcome of another unit. Six dimensions in a transactional approach to interdependence include the number of different resources involved, the frequency of transactions per unit of time, and the composite value of the resource.

Transaction cost theorists have generally neglected to consider the implications that the invisible hand of the market mechanism can have for the risk of opportunism. In the long run, the invisible hand deletes actors whose behaviors are habitually opportunistic. Consequently, as markets move toward the state of competitive equilibrium, the risk of opportunism will be low, even for transactions supported by specific asset investments. Therefore, in many contexts the transaction cost rationale for internalization has been overstated. [ABSTRACT FROM AUTHOR]

The assumptions of material self-interest, bounded rationality, and negative opportunism that underlie organizational economics are deficient for many managerial purposes because they underrepresent the importance of interpersonal and other nonmarket resources in human motivation. This paper adds an aspiration-level assumption called betterment that extends transaction cost analysis to include exchanges involving interpersonal resources. Implications are discussed for the efficient design of organizational boundaries, organizational subunits, and employment relations, and special attention is given to cooperation as an organizational asset. [ABSTRACT FROM AUTHOR]

Organizational economics (OE) is purported to offer a potential revolution in organization theory. This paper assesses the value of organizational economics for organization theorists. The conclusions are that OE is useful in extending theory building and empirical research in organization theory, but for OE to realize its full potential, it must draw upon organization theory to refine theory building and expand its scope. [ABSTRACT FROM AUTHOR]

Contrary to Barney (1990) in his reply to Donaldson (1990), this article points out that the strength of criticism of organizational economics lies in part in apprehensions about its deleterious effects upon management theory. The article also argues that there is continuing reason to doubt that organizational economics readily lends itself to synthesis with traditional management theory. The issues of the narrowness of the motivational model in organizational economics and its offensiveness and the bias against systems-level analysis and against management are discussed. [ABSTRACT FROM AUTHOR]

Donaldson's (1990) critique of organizational economics suggests four attributes of this model that make intellectual discourse and theoretical integration with traditional management theory difficult: the assumption of opportunism, different levels of analysis, the theory of motivation, and the prescriptive character of organizational economics. It is suggested that these differences are not a sufficient explanation of the response of some traditional management theorists to organizational economics. Rather than being based on these substantive differences, it is argued that the relationship between these two models has many of the attributes of an intergroup conflict. Possible responses to this intergroup conflict and the implications that these responses may have for understanding organizational phenomena are explored. [ABSTRACT FROM AUTHOR]

Organizational economics, as a newer theory, has the potential to make a constructive contribution to management theory. Nevertheless, there are several inherent problems regarding its narrow model of human motivation and behavior, its negative moral characterization of managers, and its methodological individualist bias. One solution is to embrace the positive approach of the original economic formulations. The potentialities and pitfalls of organizational economics are illustrated by reference to matrix organization structures, vertical dis-integration in insurance organizations, and corporate governance. [ABSTRACT FROM AUTHOR]

The properties of organized or team production affect three phenomena--free riding, shirking, and task visibility--that mediate the relationship between organizational structure and technology, on the one hand, and employee performance and satisfaction, on the other. Using transaction cost theory, a model of the expected effects of the mediating variables on organizational behavior is presented, and a set of derived hypotheses concerning the structure-technology-behavior relationship is developed. [ABSTRACT FROM AUTHOR]