Williamson, O., "Contractual Man" in The Economic Institutions of Capitalism, Free Press, 1985, 43-63.


Complex systems are often studied from the viewpoint of the political man, working man, economic man -- this treatise concerns the contractual man. It covers the bevioral assumptions of the contractual man, and the attributes of transactions that are economically important.

Behavioral Assumptions

Williamson believes that one can't ignore behavior when making economic models around contracts and transactions.

He sees three forms of rationality.

Maximizing rationality is the rationality of classical economics, with perfect information and pure knowledge of all possible options. Bounded rationality (the basis or transactional theory) assumes that most transactions occur with limited information (though actors try to be rational). In this situation people try to use problem solving and decision making processes to negotiate a transaction AND monitor and adapting the transaction over time. Lastly, organic rationality is more concerned with evolutionary trends where ignorance may even be better than knowledge in planning toward ends.

He also sees three levels of self-interest:

Opportunism assumes people will do whatever it takes to maximize their interests -- lie, cheat, steal, etc. Deception and misinformation are common tactics. Its a troublesome source of bevioral uncertainty in economic transactions.

Simple self-interest seeking assumes people will enter transactions without guile and fully disclose all information. Classical economics often assumes this condition.

Obedience would be the complete lack of self-interest (seldom achieved in reality).

Transactional analysis assumes bounded rationality and opportunism

Dimensions

"Transaction cost ecnomics maintains that there are rational economic reasons for organizing some transactions one way and other transactions another. The principal dimensions that predict the type of transaction used is asset specificity, uncertainty, and frequency.

Asset Specificity

This concerns that fact that unlike assumptions in classical economics, assets/resources are often unique (specialized, experienced workers, administrators), creating situations where classical ecnomics do not hold. Other situations include "lock-in" effects where a previous contract allows an exchange partner to acquire unique learning and skills through the contract that improve their bidding chances on previous contracts.

Four different types of asset specificity are physical asset specificity, human asset specificity, site specificity, and dedicated assets. These assests are developed in the context of specific transactions, with the opportunity cost being lower if the transaction type is later eliminated. Thus the continuity of a a transaction is highly valued, resulting in contractual and organizational safeguards are needed to ensure continuity (versus the traditional view that people exchange standardized goods at fair market prices instantly).

Uncertainty

Transaction cost theory assumes that governence structures differ in their capabilities to respond effectively to disturbances. Uncertainty, bounded rationality, and opportunism (also known as behavioral uncertainty) cause many problems in properly negotiating and maintaining contractual commitments. Combined with asset specifity, it becomes even more important for contracting parties to "work things out (via goverence structures and organizations).

Frequency

Investments in specialized production techniques carries more uncertainty in small markets (with few transactions) than large markets (with the potential of many transactions). The cost of specialized governence structures is easier to justfy if the frequency of transactions is high.

 

Fundamental Transformation

Traditional economics holds that there is still bidding parity among buyers even after the first transaction. Transaction theory proposes that if during the first transaction the supplying firm gains human or physical assests through the transaction (e.g., specific information and technology, specialized assets acquired through the transaction, human relationships, insider information, etc.), they are in a better position to win additional transactions. The assumption of multiple bidders reduces to one of bilateral supply later.