Is Transaction Cost Economics Behavioral?
This chapter briefly explains the need for behavioral theories of the firm, describes the characteristics thereof, and presents opposing views about whether transaction cost economics (TCE) is behavioral. Based on an evaluation against these characteristi
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Is Transaction Cost Economics Behavioral?
1.1
Introduction
Williamson’s (1975, 1985) transaction cost economics (TCE) has established itself at the center of organizational economics1 (Groenewegen 1996; Mahoney 2004; Moe 1984) as a dominant lens to view organizational boundary decisions (Parmigiani 2007; Williamson 1981). Contrary to the neoclassical theory of the firm as a production function with zero transaction cost, TCE considers the firm as a governance structure with positive transaction cost (Williamson 1998). Based on three ‘behavioral’ assumptions (perceived opportunism controllability, bounded rationality, and risk neutrality)2 and three transaction characteristics (asset specificity, uncertainty, and transaction frequency), TCE advocates that organizations choose governance structures (such as MNC subsidiary ownership) that minimize transaction costs (Williamson 1975, 1985; Zhao et al. 2004). TCE has a broad scope (Rindfleisch and Heide 1997), applicable to any issue that arises as or can be formulated as a contracting problem (Williamson 1998). Thus, TCE has wielded its influence far beyond the pales of economics into strategic management and business research in general and international business in particular (David and Han 2004; Hennart 2010; Williamson 2005; Zhao et al. 2004). Consequently, there exists an awe-inspiring literature (e.g., Macher and Richman 2008; Martins et al. 2010; Masten 2016; Shelanski and Klein 1995), both in theoretical conceptualization and in empirical testing. © The Author(s) 2021 G. Z. Peng, Toward Behavioral Transaction Cost Economics, International Marketing and Management Research, https://doi.org/10.1007/978-3-030-46878-1_1
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TCE’s achievement has been acknowledged by its proponents and not overlooked by its critics. Williamson (1999b: 1092) deems TCE to be ‘an empirical success story’, a view echoed by Macher and Richman (2008). The rise of Williamsonian TCE was a result of continued criticism of the neoclassical economics since the 1950s and 1960s for its unrealistic assumptions such as utility/profit maximization and perfect rationality (perfect information) (Hardt 2009). The same criticism had also been leveled at organization theory (Cyert and March 1963). It was in this context that scholars of the Carnegie School of behavioral research introduced some more realistic psychological and behavioral assumptions which made the development of behavioral economics and behavioral theories of the firm possible3 (Augier and March 2008a; Hardt 2009; Williamson 1996b). Lying at ‘the intersection of economics and organization’ (Williamson 1990: 117), TCE’s strategy was to combine the behavioral assumptions borrowed from the behavioral organizational theory literature with the quantitative and marginal analysis of neoclassical economics (Allen 1999; Hardt 2009; Williamson 1967). In a sense, what Williamson aspired to achieve is something which can be called a theory of behavioral organizational economics, which applies behavioral economics to organizations
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