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Edited by Peter G. Klein and Michael E. Sykuta
Chapter 26: Subjectivism, Understanding, and Transaction Costs
Fu-Lai Tony Yu Since Ronald Coase’s ‘The Nature of the Firm’ (1937), the concept of transaction costs has been applied to a wide range of economic and management issues. The transaction cost paradigm, though widely accepted and increasingly integrated into the mainstream neoclassical analysis, does not lack criticisms. A major drawback of the transaction cost paradigm is that the role of the entrepreneur is missing. Foss and Klein (2008, p. 428) rightly point out that: modern theories of the firm portray decision situations as always unambiguous and ‘given’. The choice of efficient economic organization is portrayed as a standard maximization problem . . . There is no learning, no need for entrepreneurial creation or discovery, and explicit room for the emergence of new contractual or organizational forms . . . [T]he strategy spaces are fully specified ex ante. The transaction cost theory of institutional change, as presented by Washington School economists including Steven Cheung, Douglass North, and Yoram Barzel, has also been charged with circular reasoning. Sven-Erik Sjöstrand (1995, p. 34) notes: in this paradigm, the institutional setting represents the individuals’ incentive to act. At the same time, the institutions provide the standards for eliminating ‘failing’ attempts. We then ask what explains the possible motive for an individual to do something new, something that is not part of the incentives built into the existing institutions. To put differently, how is it possible to develop new paths and institutions, when institutions themselves (as constraints) define both incentives and outcomes? Therefore, given a level of transaction...
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