Agriculture Reference
In-Depth Information
Perhaps it is a matter of emphasis, but in our view there are several points that distinguish
the transaction cost approach to contracts and organization. First, transaction cost economics
has an empirical focus on real social phenomenon, such as actual contracts, firms, law,
regulations, and so on. It is important that economists explain observable phenomena.
In contrast to this, many purely theoretical models explain stylized facts that often have
little correspondence with the world. In this respect, transaction cost economics is “applied
economics.” Second, transaction cost economics emphasizes testable hypotheses and not
simply the generation of logical explanations. Telling a story, no matter how difficult, is
valuable, but ultimately the test is how well that story fares against real data. These first
two points are important if we feel the goal of economics is the empirical understanding of
human behavior.
Third, transaction cost economics recognizes and emphasizes that assets are complex
collections of attributes, and that a full understanding of economic organization must explain
the details of the ownership and control of these attributes. Although many contract models
are based on hidden actions, these models often have single dimensions over which these
actions take place. For example, in these models a manager may be constrained to shirking
only over hours of effort. It seems likely, however, that the real problem with controlling
managers happens on margins other than effort levels in terms of hours worked. 3 Fourth,
transaction cost economics abstracts from risk aversion and risk avoidance and, instead,
focuses on pure incentive trade-offs. As we have mentioned in many places, the inclusion
of risk sharing adds complications without adding empirical tractability, and the transaction
cost approach avoids this line of reasoning. Finally, transaction cost economics assumes that
organizations are chosen to maximize the total value net of transaction costs. Whether it is
a farmer and a landowner, a worker and a capitalist, or a lawyer and a client, the transaction
cost approach argues that the structure of organization is governed by the pursuit of wealth
and the specific transaction costs that arise in that context.
Ultimately, the value of the transaction cost paradigm comes down to the importance one
places on the role of transaction costs. On this point, again we side with Coase. In both his
work on the firm and on social cost, Coase pointed out that transaction costs were necessary
and sufficient for an explanation of organization. This follows from the Coase Theorem,
which states that contracts and organizations do not have an impact on the efficient allocation
of resources when transaction costs are zero. When transaction costs are positive, then the
allocation of property rights matters and different organizational forms yield different levels
of wealth. Hence, the most important aspect of Coase's work relates to what he said about
positive transaction costs. It is ironic that so few know of Coase's work beyond the simple
zero transaction cost understanding of the Coase Theorem. As Coase (1988) himself said:
“The world of zero transaction cost has often been described as a Coasian world. Nothing
Search WWH ::

Custom Search