The Secret Life of Mundane Transaction Costs

Richard N. Langlois ()

No 2005-49, Working papers from University of Connecticut, Department of Economics

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.

Keywords: transaction costs; division of labor; modularity; standards; property rights. (search for similar items in EconPapers)
JEL-codes: D23 L22 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fmk and nep-hpe
Date: 2005-11
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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