Thursday, March 8, 2012

When to choose Markets/Hierarchy as a governance mechanism

In the last blog, we looked at the 2 underlying assumptions of the TCT. In today's blog we shall discuss about how a choice of governance could be made between the market based approach and the hierarchy based approach.

Organizations will invariably choose that form of governance that reduces any potential exchange problems created by bounded rationality compared to the threat of opportunism. There is not second thought that governance of economic transactions is a costly venture. Given this premise, we could state the following regarding the choice

If organizations had to worry about minimizing the costs of governing their economic exchanges, then they would always choose market forms of governance. Alternatively, if the worry was about minimizing the effects of bounded rationality and opportunism on their exchanges, organizations would always choose hierarchical forms of governance.

The organizations necessarily would have to take a call on which approach to take considering the priority and looking at the potential outcomes of the choice of governance they make.

No comments:

Post a Comment