From Coase to Williamson: Evolution, Formalization and Empirics of Transaction Cost Economics

This paper discusses the evolution of transaction cost economics from the time of Ronald Coase to the recent developments by Williamson. Transaction cost economics was pioneered by Ronald Coase in his attempt to understand the existence of the firm, something that sounds no brainer but has in fact resulted in two Nobel Prizes in economics. The view by Coase that the market is efficient has been challenged by Williamson, who developed a framework illustrating the interplay of human and environmental factors that explain why the market may not be efficient, the causes of market failure, and then proposes vertical integration to remediate market failure. Williamson is credited for having developed transaction cost economics into an empirically testable theory; this essay also explores some empirical findings on transaction costs.