Fairness and Transaction Costs: The Contribution of Organizational Justice Theory to an Integrative Model of Economic Organization

In this article, we begin to integrate two fields that have, until now, remained largely independent of one another: organizational justice and transaction-cost economics. Transaction costs consist of search, bargaining, monitoring, enforcement, and other costs not directly related to the production of goods or services. Usually such costs are attributed to difficulties in measurement (the metering problem) or difficulties in redeploying assets to alternative uses (asset specificity). These variables are thought to be objective features of economic transactions. Rarely are the social-psychological dimensions of these objective features taken into account. Although economic transactions are fundamentally human activities, human behavior in the economics literature is usually reduced to such simplifying assumptions as shirking and bounded rationality. In this article, we develop a model of transaction costs based on a more complete description of human psychology as it operates in exchange relationships.We argue that transaction costs are often due to the difficulty of evaluating the fairness of a specific exchange of goods and services. Besides asset specificity and the metering problem, which are treated in the transaction-cost economics literature, the organizational justice literature is especially relevant. Beginning with the work of Ouchi (1980), the paper examines some of the ways that the organizational justice literature complements transaction-cost economics. Because mechanisms that order economic transactions are essentially conflict-resolution structures, we develop a model of economic organization in which transaction costs are related to the perception of fairness in economic exchange. In the literature, governance mechanisms are selected so as to minimize transaction costs. Based on the organizational justice framework, we suggest that the transaction-cost calculus is affected by the perception of fairness in the exchange. In addition, the relationship between the governance mechanism and the perception of fairness is moderated by the elements of interactional justice that characterize the exchange.