Chapter 3 The Make-Buy Decision: A Theoretical
Perspective
Assumption Description
Bounded rationality ‘Human behaviour is intendedly rational but only limitedly
so’ (Simon, 1957). Bounded rationality takes forms of
neurophysiological and language limits. In uncertain or
complex environments bounded rationality is predicted to
cause a shift to hierarchy.
Opportunism ‘Self-interest seeking with guile’ (Williamson, 1975). Argued
that not all actors will behave opportunistically, but due to
the constraints of bounded rationality and uncertainty it is
difficult, if not impossible, to distinguish between those who
will cooperate and those who will behave opportunistically.
Asset specificity Asset specificity considers how specialised a particular asset
is to a relationship. Specialised assets are risky in that the
full production value of the asset cannot be transferred if a
contract or relationship is prematurely terminated.
Williamson categorised four types of specific assets: site
specificity, physical asset specificity, human asset specificity,
and dedicated assets. A relationship with high asset
specificity is theorised to increase the possibility of
opportunism. As such, firms may choose to integrate the
process rather than run the risk of the open market.
Uncertainty Uncertainty costs consist of ex ante, environmental costs,
and ex poste, behavioural costs. A firm facing a highly
uncertain environment will face highly complex a priori
contractual agreements or may face high renegotiation costs
as the relationship develops. Firms face ex poste costs when
the behaviour of the partner firm is uncertain. TCE logic
holds that when uncertainty is high, firms should resort to
hierarchy.
Summary of the assumptions of Transaction Cost Economics
1
Perspective
Assumption Description
Bounded rationality ‘Human behaviour is intendedly rational but only limitedly
so’ (Simon, 1957). Bounded rationality takes forms of
neurophysiological and language limits. In uncertain or
complex environments bounded rationality is predicted to
cause a shift to hierarchy.
Opportunism ‘Self-interest seeking with guile’ (Williamson, 1975). Argued
that not all actors will behave opportunistically, but due to
the constraints of bounded rationality and uncertainty it is
difficult, if not impossible, to distinguish between those who
will cooperate and those who will behave opportunistically.
Asset specificity Asset specificity considers how specialised a particular asset
is to a relationship. Specialised assets are risky in that the
full production value of the asset cannot be transferred if a
contract or relationship is prematurely terminated.
Williamson categorised four types of specific assets: site
specificity, physical asset specificity, human asset specificity,
and dedicated assets. A relationship with high asset
specificity is theorised to increase the possibility of
opportunism. As such, firms may choose to integrate the
process rather than run the risk of the open market.
Uncertainty Uncertainty costs consist of ex ante, environmental costs,
and ex poste, behavioural costs. A firm facing a highly
uncertain environment will face highly complex a priori
contractual agreements or may face high renegotiation costs
as the relationship develops. Firms face ex poste costs when
the behaviour of the partner firm is uncertain. TCE logic
holds that when uncertainty is high, firms should resort to
hierarchy.
Summary of the assumptions of Transaction Cost Economics
1
