Transaction Cost Economics and Contractual Relations

One of the key factors in the study of transaction costs economics is the concept of opportunism. Williamson (1986) develops a heuristic model of transaction costs and governance structures, in which the critical dimensions with respect to which transaction costs differ are identified. These dimensions are the frequency of exchange, the degree of relationship-specific investment, and uncertainty. This work examines if empirically, through the use of case studies, there is support for Williamson's model. Firms in four different industries were interviewed about their contractual relationships with their customers or suppliers. The degree of asset specificity and transaction costs differs across these industries and across firms within an industriy. We find that there is strong support for the Williamson model, however, a critical dimension that is omitted from the model is market structure. By affecting the number of alternative sellers and buyers, and hence the risk of opportunism, we find that market structure also has important consequences for the nature of contractual relations to be found governing firms' transactions.