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The transaction cost economics (TCE) theory of trading favors

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  • Alain Verbeke

    ()

  • Liena Kano

    ()

Abstract

Trading favors is a pervasive business practice, especially in emerging economies. To date, a range of theories has been utilized to explore trading favors, but most extant studies focus especially on negative aspects of favors (e.g., corruption and bribery). We adopt transaction cost economics (TCE) to analyze systematically trading favors as an economizing practice serving efficiency purposes. From the TCE perspective, trading favors is a component of the relational contracting portion of transaction governance, and contributes to economizing on bounded rationality and bounded reliability. We hypothesize that trading favors will be more prevalent in (1) macro-contexts characterized by a vacuum of formal institutions as well as by excessive formal rules; (2) cultural contexts where in-group membership is highly valued; (3) high bounded rationality/low bounded reliability contexts where frequent opportunities exist for indirect reciprocity; and (4) cases whereby no asset-specific investment(s) in innovation need to be made by the supplier of the favor. Enforcement mechanisms such as in-group sanctions, access to formal contracting as a complement to favors, possibility of image scoring and incentive compatibility can function as critical components of the trading favors practice. We suggest a classification of favor trading practices based on their link to formal contracting and rate of recurrence, and describe a range of likely impacts. Copyright Springer Science+Business Media, LLC 2013

Suggested Citation

  • Alain Verbeke & Liena Kano, 2013. "The transaction cost economics (TCE) theory of trading favors," Asia Pacific Journal of Management, Springer, vol. 30(2), pages 409-431, June.
  • Handle: RePEc:kap:asiapa:v:30:y:2013:i:2:p:409-431
    DOI: 10.1007/s10490-012-9324-6
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    References listed on IDEAS

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    Cited by:

    1. Boddewyn, Jean J., 2016. "International business–government relations research 1945–2015: Concepts, typologies, theories and methodologies," Journal of World Business, Elsevier, vol. 51(1), pages 10-22.
    2. Yan Li & Fiona Yao & David Ahlstrom, 2015. "The social dilemma of bribery in emerging economies: A dynamic model of emotion, social value, and institutional uncertainty," Asia Pacific Journal of Management, Springer, vol. 32(2), pages 311-334, June.
    3. repec:spr:infosf:v:19:y:2017:i:3:d:10.1007_s10796-015-9611-0 is not listed on IDEAS
    4. Lingling Gao & Kerem Aksel Waechter, 0. "Examining the role of initial trust in user adoption of mobile payment services: an empirical investigation," Information Systems Frontiers, Springer, vol. 0, pages 1-24.
    5. Lijia, Wang & Xuexi, Huo, 2014. "Grower's Selling Behavior: Transaction Cost Comparison Analysis," Agricultural Economics Review, Greek Association of Agricultural Economists, vol. 15(2), June.
    6. repec:pal:jintbs:v:48:y:2017:i:9:d:10.1057_s41267-017-0127-3 is not listed on IDEAS

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