1.1 Introduction
Williamsonâs (1975, 1985) transaction cost economics (TCE) has established itself at the center of organizational economics1 (Groenewegen 1996; Mahoney 2004; Moe 1984) as a dominant lens to view organizational boundary decisions (Parmigiani 2007; Williamson 1981). Contrary to the neoclassical theory of the firm as a production function with zero transaction cost, TCE considers the firm as a governance structure with positive transaction cost (Williamson 1998). Based on three âbehavioralâ assumptions (perceived opportunism controllability, bounded rationality, and risk neutrality)2 and three transaction characteristics (asset specificity, uncertainty, and transaction frequency), TCE advocates that organizations choose governance structures (such as MNC subsidiary ownership) that minimize transaction costs (Williamson 1975, 1985; Zhao et al. 2004). TCE has a broad scope (Rindfleisch and Heide 1997), applicable to any issue that arises as or can be formulated as a contracting problem (Williamson 1998). Thus, TCE has wielded its influence far beyond the pales of economics into strategic management and business research in general and international business in particular (David and Han 2004; Hennart 2010; Williamson 2005; Zhao et al. 2004). Consequently, there exists an awe-inspiring literature (e.g., Macher and Richman 2008; Martins et al. 2010; Masten 2016; Shelanski and Klein 1995), both in theoretical conceptualization and in empirical testing. TCEâs achievement has been acknowledged by its proponents and not overlooked by its critics. Williamson (1999b: 1092) deems TCE to be âan empirical success storyâ, a view echoed by Macher and Richman (2008).
The rise of Williamsonian TCE was a result of continued criticism of the neoclassical economics since the 1950s and 1960s for its unrealistic assumptions such as utility/profit maximization and perfect rationality (perfect information) (Hardt 2009). The same criticism had also been leveled at organization theory (Cyert and March 1963). It was in this context that scholars of the Carnegie School of behavioral research introduced some more realistic psychological and behavioral assumptions which made the development of behavioral economics and behavioral theories of the firm possible3 (Augier and March 2008a; Hardt 2009; Williamson 1996b). Lying at âthe intersection of economics and organizationâ (Williamson 1990: 117), TCEâs strategy was to combine the behavioral assumptions borrowed from the behavioral organizational theory literature with the quantitative and marginal analysis of neoclassical economics (Allen 1999; Hardt 2009; Williamson 1967). In a sense, what Williamson aspired to achieve is something which can be called a theory of behavioral organizational economics, which applies behavioral economics to organizations and enriches and contextualizes behavioral economics by decision-making and problem-solving processes of managers in organizations (Camerer and Malmendier 2007). The success of such a theory will depend first of all on whether its behavioral assumptions are genuinely applied to organizations.4 Nevertheless, Williamson provides no firm answer to this question. Despite its borrowed behavioral assumptions, Williamson (2002) admits that TCE is different from the behavioral economics program that flourished at Carnegie in the late 1950s/early 1960s and is âmore neoclassicalâ. But at the same time, he also seems to suggests that his version of TCE is behavioral by saying that TCE ânevertheless relates to the Carnegie project in many respectsâ (Williamson 2002) and can trace its roots in the Carnegie School of behavioral research (Williamson 1996b, 2002).
The ambiguous treatment of behavioral assumptions in TCE has attracted considerable debate and criticism (e.g., Foss 2003a; Foss and Klein 2010; Ghoshal and Moran 1996; Pessali 2006). While such debate and criticism contribute to improving understanding of TCE, they tend to raise rather than answer questions. As such, multiple fundamental questions remain gapingâCan TCE be regarded as a behavioral theory merely based on its invocation of some âbehavioralâ assumptions? What causes the serious conflation among opportunism, bounded rationality and uncertainty? Is opportunism a necessary assumption in TCE? Are opportunism and bounded rationality in TCE values, attitudes, or behaviors? How to model bounded rationality? Should managers focus on opportunism or bounded rationality?âWhile these questions are important for TCE-based research, scholars have been asking these questions in a sporadic way and on an on-and-off basis. Considering the striking contrast between these gaping questions and the self-proclaimed âsuccess storyâ (Williamson 1999b: 1092), we deem that a wholesale assessment of these questions would be useful for TCE, particularly at its current mature stage (Bunge 1967), which also is a stage of theoretical stagnation (Furubotn and Richter 2010). While it has long been pointed out that TCE âneeds to be refined and extendedâŚqualified and focusedâŚâŚ[and] tested empiricallyâ5 (Williamson 1992), fundamental theoretical extensions to TCE are rare, even though there have been efforts to link it to other theories (e.g., Foss and Foss 2004; Mahoney and Qian 2013; Martinez and Dacin 1999). The current book intends to be such a fundamental undertaking, and the success of which can only be achieved by standing on the shoulders of giants and with the benefit of hindsight.
This book contends that the aforementioned questions arise from TCEâs tacit positivist approach, which is inadequate to an innately behavioral process of organizational decision-making. They boil largely down to one overarching objection: while TCE invokes some behavioral assumptions, it is still âstealthilyâ committed to the maximization and rationality assumptions in neoclassical economics (Earl 1988; Sent 2004) rather than satisficing and bounded rationality (Williamson 1996b),6 and is positivist and deductivist in nature (Godfrey and Hill 1995; Ingham 1996; Pratten 1997). I...
