Transaction cost economics theory

The Transaction Cost Economics Theory entry includes sections that define the theory, explore developments in the theory, demonstrate specific application of the theory to HRM, and provide suggested topic areas for future research. Transaction Cost Economics has its roots in the economic concern about why firms exist. The origins are conventionally attributed to the work of , who, in the 1930s, argued economists should be able to explain why the United States (US) economy was dominated by large firms, when by economic theory markets should always be more efficient in terms of allocative efficiency that any other mechanism. If markets were superior in this respect, then firms should only exist when there were impediments to market performance. So, in Coase’s terms, firms resulted from market failure; specifically, where the price mechanism failed. The price mechanism would fail where there was only one provider or purchaser, in which case Coase argued that ‘administrative solutions’ would substitute. It is important to note that in this early work there was no discussion about what these administrative solutions would be, and Coase has little to say about what could or should go on within the firm.