Edited by Peter G. Klein and Michael E. Sykuta
Chapter 28: Limits of Transaction Cost Analysis
Geoffrey M. Hodgson Transaction cost economics (TCE) is one of the most influential approaches in the social sciences today. In reality, transaction costs exist. Yet they were neglected in economic theory until Ronald Coase (1937) and Oliver Williamson (1975) explored their implications. Nevertheless, there are many unanswered questions of a conceptual, theoretical and empirical nature. Even the term ‘transaction cost’ awaits an adequately precise definition. As Williamson (1995, p. 33) himself notes: ‘There is nonetheless a grave problem with broad, elastic and plausible concepts – of which “transaction costs” is one and “power” is another – in that they lend themselves to ex post rationalization. Concepts that explain everything explain nothing’. The critical literature on TCE is almost as large as the TCE literature itself. This chapter examines some of the issues requiring attention. The following section looks at claims concerning the empirical evidence. The two remaining sections look at some central theoretical problems. The argument is not that TCE has to be junked, but that it has to be significantly extended to deal with some of the major problems and omissions. Evidence and alternatives Williamson has been hugely instrumental in the rise to prominence of TCE. His operationalization of TCE avoids direct measurement of transaction costs themselves, to focus instead on other variables, such as uncertainty and asset specificity. Reviewing empirical work in the area, Williamson (1985, p. 130; 1999, p. 1092; 2000, pp. 605–7) upholds that the ‘cumulative evidence’ for TCE is ‘broadly corroborative’ and it is ‘an empirical...
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