Transaction cost economics

Transaction cost economics (Coase 1937, Williamson 1975) explains why firms exist: when the costs of market contracting — searching, bargaining, monitoring, enforcing — exceed the costs of internal hierarchy, transactions are brought inside the firm. The key determinants are asset specificity (how specialized an investment is to a particular transaction), uncertainty (how unpredictable the future is), and frequency (how often the transaction recurs). Williamson extended Coase's insight into a systematic framework for comparing governance structures: markets, hybrids, and hierarchies each have different cost profiles under different conditions. But the framework treats organizational form as a static efficiency choice, missing the dynamic, political processes by which boundaries are constantly renegotiated. A theory that ignores power is not a theory of organization — it is a theory of why economists wish organizations worked.