Tuesday, March 6, 2012

Formulation of the Transaction Cost Theory - Williamson

In the last blog, we looked at how hierarchies could enable effective and efficeint handling of the transactions within the organization. In today's blog, we look at how Williamson formulates the Transaction Cost Theory - and discuss this further over the next few blogs.

Williamson approahes TCT stating that markets and hierarchies are alternative instruments for completing a set of transactions. These are called "Governance Mechanisms".

While market form of governance relies on prices, competition and contracts to keep all parties to exchange informed rights and responsibiltiies; the hierarchical form of governance get these exchanges doen under an autoritative third part (the boss) who attempts to keep all parties in the exchange informed of their rights and responsibiltiites.

The following picture summarizes these alternatives as suggested by Williamson's TCT

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