Transactions Cost Analysis

Oliver Williamson (1975) proposed looking at the costs of entering into transactions as a focus of organizational research -- "do the parties to the exchange operate harmoniously,or are there frequent misunderstandings and conflicts that lead to delays, breakdowns, and other malfunctions" (Williamson, 1981: 552).

He turns an economist's eye toward governance structures. As exchanges become more complex and uncertain (unstable environment, unscrupulous traders), various kinds of external and internal controls are needed to help reduce the risk (i.e., transaction cost) of exchanges. "Organizational structures are viewed as one important arrangement for establishing and safeguarding transactions" (Scott p. 107). Thus organizations are created partly to reduce transaction costs.

Williamson adds that organizational structures forms may vary with the type of exchanges to be performed.