Monday, March 12, 2012

Uncertainty as a determinant of the transaction governance mechanism

In the last blog, we discussed what could be the underlying logic for comapnies to choose between hierarchy and market to deal with transactions.In today's blog we look at how bounded rationality influences this choice, and what are the problems that could come by. When organizations try to deal with transactions, it is the uncertainty and the transaction specific investments that have been seen to create a large variety of problems.

It is pretty clear that bounded rationality has grown on the uncertainty organizations face - if not for the uncertainty, the bounded rationality would have no meaning. All parties involved in the transaction could ancticipate precisely how the transaction would evolve over time, and so managing it over time is very simple.A contract that specifies all the possible current and future states of the exchange and a clear statement of rights and responsibilities of the parties involved would have made the trick. 

It could thus be said that greater the level of uncertainty in a transaction, the usage of contracts as a means of governance would be difficult if not impossible; hence a more likely form of governance in that case is the hierarchy one.

In hierarchical governance, there is a dedicated third party, who decides how the unaniticipated issues that occur during the course of the transaction could be resolved. The parties donot need to anticipate the problems that might emerge eventually - they are taken up on and mediated as and when they arise.

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