A Critique of Transaction Cost Theory

A critique of transaction cost theory

Definition:

"Transaction cost theory holds that market failure occurs such that the normal economic pressure on economic actors to perform effectively breaks down and has to be replaced by hierarchical controls."

Analysis of definition:

Economic pressure is competition

Perform effectively – non opportunistically

Hierarchical controls vertical integration, further monitoring and check

- TC (transaction cost) theory is part of organizational economics

Critique:

1. TC theory explains the "man" as a opportunistically seeking and self- interest driven.

~ this is too much a generalization; there might be such people, but not everyone is like that. The TC theory explains the managers by only attributing to them negative qualities. And the only solution according to it is extra control and supervision. Donaldson criticize this view majorly, as describing the manager as playing an important role in the organization and stabilizing it. He is even the most important in the organization because stakeholders change, but the managers stay in the company and organize it with their knowledge and skills. Their role is to represent the stability of the company and they are the one who can assure the suppliers that the specific – investment they make won't be neglected. Therefore Donaldson argue that managers have mostly positive than negative behavior.

 Even though the theory is supposed to have its background from economics, it is rejected by it. Economic theory suggests that in the long run competition solves the problem of opportunistic behavior, therefore not so