Firm-Specific Learning and the Nature of the Firm. Why Transaction Costs May Provide an Incomplete Explanation

This article discusses the limits of a purely transaction cost explanation of the existence of the firm by pointing to additional factors. A simple heuristic model shows that firm-specific learning effects can overcome the costs of monitoring employees, and explain the existence of the firm even in the absence of transaction costs related to the market mode of organisation. Comparing the relative importance of transaction cost and capabilities explanations for the existence of the firm, there is no a priori reason to assume the supremacy of one type of explanation over the other. We argue that a conjoint research program, encompassing both transaction costs and capabilities, must be developed and tested empirically.