Transaction Cost - Differences From Neoclassical Microeconomics

Differences From Neoclassical Microeconomics

Williamson argues in The Mechanisms of Governance (1996) that Transaction Cost Economics (TCE) differs from neoclassical microeconomics in the following six points:

• Behavioral assumptions: whereas neoclassical theory assumes hyperrationality and ignores most of the hazards related to opportunism, TCE assumes bounded rationality.
• Unit of analysis: whereas neoclassical theory is concerned with composite goods and services, TCE analyzes the transaction itself.
• Governance structure: whereas neoclassical theory describes the firm as a production function (a technological construction), TCE describes it as a governance structure (an organizational construction).
• Problematic property rights and contracts: whereas neoclassical theory often assumes that property rights are clearly defined and the cost of enforcing those rights by the mean of courts is negligible, TCE treats property rights and contracts as problematic.
• Discrete structural analysis: whereas neoclassical theory uses continuous marginal modes of analysis in order to achieve second-order economizing (adjusting margins), TCE analyzes the basic structures of the firm and its governance in order to achieve first-order economizing (improving the basic governance structure).
• Remediableness: whereas neoclassical theory recognizes profit maximization or cost minimization as criteria of efficiency, TCE insists that there is no optimal solution and that all alternatives are flawed, thus bounding "optimal" efficiency to the solution with no superior alternative and whose implementation produces net gains.