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The Secret Life of Mundane Transaction Costs

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  • Richard N. Langlois

    (University of Connecticut)

Abstract

Transaction costs, one often hears, are the economic equivalent of friction in physical systems. Like physicists, economists can sometimes neglect friction in formulating theories; but like engineers, they can never neglect friction in studying how the system actually does let alone should work. Interestingly, however, the present-day economics of organization also ignores friction. That is, almost single-mindedly, the literature analyzes transactions from the point of view of misaligned incentives and (especially) transaction-specific assets. The costs involved are certainly costs of running the economic system in some sense, but they are not obviously frictions. Stories about frictions in trade are not nearly as intriguing as stories about guileful trading partners and expensive assets placed at risk. But I will argue that these seemingly dull categories of cost what Baldwin and Clark (2003) call mundane transaction costs actually have a secret life. They are at least as important as, and quite probably far more important than, the more glamorous costs of asset specificity in explaining the partition between firm and market. These costs also have a secret life in another sense: they have a secret life cycle. I will argue that these mundane transaction costs provide much better material for helping us understanding how the boundaries among firms, markets, and hybrid forms change over time.

Suggested Citation

  • Richard N. Langlois, 2005. "The Secret Life of Mundane Transaction Costs," Working papers 2005-49, University of Connecticut, Department of Economics.
  • Handle: RePEc:uct:uconnp:2005-49
    Note: Solicited for Peripheral Vision section of Organization Studies. The author benefited from presenting early versions of this paper at the miniconference on Linking Strategy, Technology and Organization: Strategic and Institutional Perspectives on Modularity, London Business School, October 2, 2003, and at the conference on The Evolution of Designed Institutions, Max Planck Institute for Research into Economic Systems, February 19-21, 2004, Jena, Germany, as well as at seminars at the Copenhagen Business School and the Fisher School of Business at Ohio State.
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    References listed on IDEAS

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    1. Williamson, Oliver E, 1979. "Transaction-Cost Economics: The Governance of Contractural Relations," Journal of Law and Economics, University of Chicago Press, vol. 22(2), pages 233-261, October.
    2. Joseph E. Stiglitz, 2002. "Information and the Change in the Paradigm in Economics," American Economic Review, American Economic Association, vol. 92(3), pages 460-501, June.
    3. Richardson, G B, 1972. "The Organisation of Industry," Economic Journal, Royal Economic Society, vol. 82(327), pages 883-896, September.
    4. George J. Stigler, 1951. "The Division of Labor is Limited by the Extent of the Market," Journal of Political Economy, University of Chicago Press, vol. 59, pages 185-185.
    5. George J. Stigler, 1961. "The Economics of Information," Journal of Political Economy, University of Chicago Press, vol. 69, pages 213-213.
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    Cited by:

    1. Nolan Charles & Trew Alex, 2015. "Transaction Costs and Institutions: Investments in Exchange," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 15(2), pages 391-432, July.
    2. Fixson, Sebastian K. & Park, Jin-Kyu, 2007. "The Power of Integrality: Linkages between Product Architecture, Innovation, and Industry Structure," Working papers 37154, Massachusetts Institute of Technology (MIT), Sloan School of Management.
    3. Paul L. Robertson, 2006. "Transaction Costs, Trust, and the Structuring of Markets," Discussion Papers Series 342, School of Economics, University of Queensland, Australia.

    More about this item

    Keywords

    transaction costs; division of labor; modularity; standards; property rights.;

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure

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