Aric Rindfleisch & Jan B. Heide Transaction Cost Analysis ... 08, 2016 · entry strategy (e.g., Anderson and ... opportunity costs of making inferior govemance decisions. ... exploit

Aric Rindfleisch & Jan B. Heide

Transaction Cost Analysis: Past,Present, and Future Applications

Over the past decade, transaction cost analysis (TCA) has received considerable attention in the marketing litera-ture. Marketing scholars have made important contributions in extending and refining TCA's original conceptualframework. The authors provide a synthesis and integration of recent contributions to TCA by both marketers andscholars in related disciplines, an evaluation of recent critiques of TCA, and an agenda for further research on TCA.

Over the past decade, transaction cost analysis (TCA)has received an increased amount of attention froma broad range of audiences. Evidence of this atten-

tion takes many forms, the most visible being the recentNobel award in Economics given to Ronald Coase for hisearly work on transaction costs (Coase 1991). Althoughmost strongly advocated by economists such as OliverWilliamson and Paul Joskow, TCA has generated consider-able interest in other academic disciplines beyond econom-ics, including sociology (e.g., Cranovetter 1985), politicalscience (e.g., Moe 1991), organization theory (e.g., Bameyand Hesterly 1996), contract law (e.g., Palay 1984), businessstrategy (e.g., Hennart 1988), corporate finance (e.g.. Smithand Schnucker 1994), and marketing (e.g., Anderson 1985).

A particular manifestation of recent interest in TCA is alarge number of empirical applications. Much of the empir-ical work has been conducted by marketing scholars. Thereare at least two reasons for this: First, TCA's substantivefocus on exchange makes it relevant to a wide range of mar-keting phenomena, including vertical integration decisions(e.g., Anderson 1985; John and Weitz 1988), foreign marketentry strategy (e.g., Anderson and Coughlan 1987; Klein,Frazier, and Roth 1990), sales force control and compensa-tion issues (e.g., Anderson 1988; John and Weitz 1989),industrial purchasing strategy (e.g., Noordewier, John, andNevin 1990; Stump and Heide 1996), and distribution chan-nel management (e.g., Anderson and Weitz 1992; Heide andJohn 1988). Second, marketing's rich tradition in constructmeasurement and survey research techniques has con-tributed to the operationalization and testing of importantparts of the TCA framework. As has been noted by severalscholars, measures of TCA's central constructs often are not

Aric Rindfleisch is Assistant Professor of Marketing, College of Businessand Public Administration, University of Arizona. At the time this work wascompleted, he was a doctoral candidate in Marketing, University of Wis-consin-Madison. Jan B. Heide is Associate Professor of Marketing, Schoolof Business, University of Wisconsin-Madison. The authors thank JackNevin, Thani Jambulingam, Christine Moorman, Antony Santos, and threeanonymous reviewers for their helpful comments on earlier versions of thisarticle.

available from secondary data, and valid empirical testsoften require that "micro-level data" be collected at the levelof the actual decision maker (Calfee and Rubin 1993;Joskow 1991; Williamson 1985).

In spite of this recent attention, insights from TCA appli-cations still appear to be somewhat underutilized. Two par-ticular problems exist: First, though the extant empiricalresearch has led to important refinements of early versionsof the TCA framework (e.g., Coase 1937; Williamson 1975,1985), many of these refinements are not well known. Thisis evidenced by a tendency among TCA's critics to focus onits initial versions (e.g. Choshal and Moran 1996; Hill1990). Many scholars view TCA as synonymous withWilliamson's (1975) Markets and Hierarchies and ignoresubsequent empirical work. Consequently, it is difficult toevaluate the merit of such critiques, and empirical refine-ments have a reduced impact on the development of TCA'stheoretical framework.

Second, TCA's empirical research is not well integrated.Considered as a whole, the literature has identified a set ofdistinct antecedent conditions or govemance problems, suchas safeguarding specific assets. These are TCA's indepen-dent variables. Transaction cost analysis's dependent vari-ables are the govemance mechanisms, which are used tomanage these problems. A variety of mechanisms have beenidentified in previous research, including pledges (Andersonand Weitz 1992), qualification procedures (Heide and John1990), monitoring (Stump and Heide 1996), and contracts(Joskow 1987).

Unfortunately, the TCA literature lacks a thoroughreview that organizes and summarizes the empirical evi-dence regarding govemance problems and mechanisms. Asa result, it is unclear what exactly has been leamed by theextant TCA research and what unresolved questionsremain. Our purpose is to address this concem by providingsuch a review. We begin with a brief overview of TCA, itsorigins, underlying assumptions, and key constructs. Byaddressing issues of interest to marketing scholars, we thenprovide a review that synthesizes and integrates the find-ings of 45 key empirical TCA studies across a broad rangeof disciplines. We end with a discussion of TCA's unre-solved theoretical issues and offer directions for furtherresearch.

30 / Journal of Marketing, October 1997Journal of MarketingVol. 61 (October 1997), 30-54

Transaction Cost Analysis:Origins and Overview

Transaction cost analysis belongs to the "New InstitutionalEconomics" paradigm, which, over time, has supplanted tra-ditional neoclassical economics. Although neoclassical eco-nomics has largely ignored the concept of the firm by view-ing it strictly as a production function (Bamey and Hesteriy1996), TCA explicitly views the firm as a governance struc-ture. One of Coase'S'(1937) initial propositions was thatfirms and markets are altemative govemance structures thatdiffer in their transaction costs. Specifically, Coase proposesthat under certain conditions, the costs of conducting eco-nomic exchange in a market may exceed the costs of orga-nizing the exchange within a fimi. In this context, transac-tion costs are the "costs of mnning the system" and includesuch ex ante costs as drafting and negotiating contracts andsuch ex post costs as monitoring and enforcing agreements.

Over the past two decades, Williamson (1975, 1985,1996) has added considerable precision to Coase's generalargument by identifying the types of exchanges that aremore appropriately conducted within firm boundaries thanwithin the market. He also has augmented Coase's initialframework by suggesting that transaction costs include boththe direct costs of managing relationships and the possibleopportunity costs of making inferior govemance decisions.Williamson's microanalytical framework rests on the inter-play between two main assumptions of human behavior(i.e.; bounded rationality and opportunism) and two keydimensions of transactions (i.e., asset specificity and uncer-tainty). We next provide a brief description of the interactionbetween these behavioral assumptions and transactiondimensions.

Assumptions and Dimensions of TransactionCost AnaiysisBounded rationality is the assumption that decision makershave constraints on their cognitive capabilities and limits ontheir rationality. Although decision makers often intend toact rationally, this intention may be circumscribed by theirlimited information processing and communication ability(Simon 1957). According to TCA, these constraints becomeproblematic in uncertain environments, in which the cir-cumstances surrounding an exchange cannot be specified exante (i.e., environmental uncertainty) and performance can-not be easily verified ex post (i.e., behavioral uncertainty).

The primary consequence of environmental uncertaintyis an adaptation problem, that is, difficulties with modifyingagreements to changing circumstances. For example, a man-ufacturer that, because of competitive entry, must modifythe design of its product also may need to modify the designof the purchased components that constitute the end product.Unless a comprehensive contract can be written with its sup-plier, which specifies in advance the required componentdesigns and the associated terms of trade, the manufacturermay need to assume the considerable transaction costs asso-ciated with ongoing renegotiations.

The effect of behavioral uncertainty is a performanceevaluation problem, that is, difficulties in verifying whethercompliance with established agreements has occurred. For

example, a manufacturer may have difficulty ascertainingwhether a distributor is providing customers with necessarypresales services. Altematively, even if the relevant aspectsof a distributor's operations can be measured, the informa-tion gathering and processing costs, incurred by the manu-facturer may be substantial.

Opportunism is the assumption that, given the opportu-nity, decision makers may unscrupulously seek to serve theirself-interests, and that it is difficult to know a priori who istmstworthy and who is not (Bamey 1990). Williamson(1985, p. 47) defines opportunism as "self-interest seekingwith guile," and suggests that it includes such behaviors aslying and cheating, as well as more subtle forms of deceit,such as violating agreements. Opportunism poses a problemto the extent that a relationship is supported by specificassets whose values are limited outside of the focal relation-ship. For example, a manufacturer that invests in training adistributor may subsequently have difficulty replacing thedistributor with a new one. The incumbent distributor canexploit the situation opportunistically by demanding variouskinds of concessions from the manufacturer. Essentially, theeffect of specific assets is to create a safeguarding problem,because market competition no longer serves as a restrainton opportunism.'

In addition to the key assumptions and dimensions pre-viously outlined, the complete TCA framework alsoincludes risk neutrality as a third behavioral assumption andtransaction frequency as a third transactional dimension.Both of these constructs are specified by Williamson (1975,1985) but have received limited attention in the TCA litera-ture. Chiles and McMackin (1996) provide a theoretical dis-cussion of the validity of TCA's assumption of risk neutral-ity, but there are no empirical investigations of this assump-tion. To date, only a few TCA studies explicitly addresstransaction frequency.^ According to Williamson (1985, p.60), higher levels of transaction frequency provide an incen-tive for firms to employ hierarchical govemance, because"the cost of specialized govemance structures will be easierto recover for large transactions of a recurring kind."Because of the limited attention that previous research hasgiven to both the assumption of risk neutrality and thedimension of transaction frequency, our review does notaddress these parts of the TCA framework.

'The safeguarding problem discussed in TCA closely parallelsthe discussion of dependence In resource dependence and socialexchange theory (e.g., Pfeffer and Salancik 1978), because specificassets give rise to "replaceability" problems. However, TCA differsfrom these perspectives because it focuses on governance problemsand their solutions simultaneously, rather than on managing depen-dence ex post. Moreover, TCA explicitly considers the efficiencyimplications of a firm's governance choices.

2To date, TCA researchers have been largely unsuccessful inconfirming the hypothesized effects of frequency, in that severalstudies have failed to find any positive association between trans-action frequency and hierarchical governance (e.g., Anderson1985; Anderson and Schmittlein 1984; Maltz 1993, 1994). For anexception, see Klein (1989). Several other researchers consider fre-quency as a dichotomous phenomena (one-time versus recurringtransactions) and thereby control for transaction frequency byexamining only recurring exchanges (e.g. John and Weitz 1988;Klein, Frazier, and Roth 1990).

Transaction Cost Analysis / 31

The Logic of Transaction Cost Analysis

The basic premise of TCA is that if adaptation, performance-evaluation, and safeguarding costs are absent or low, eco-nomic actors will favor market govemance. If these costs arehigh enough to exceed the production cost advantages of themarket, firms will favor intemal organization. The logicbehind this argument is based on certain a priori assump-tions about the properties of intemal organization and itsability to minimize transaction costs. Three specific aspectsof organizations are relevant in this respect. First, organiza-tions have more powerful control and monitoring mecha-nisms available than do markets because of their ability tomeasure and reward behavior as well as output (Eisenhardt1985; Oliver and Anderson 1987). As a result, the firm'sability to detect opportunism and facilitate adaptation isenhanced. Second, organizations are able to provide rewardsthat are long term in nature, such as promotion opportuni-ties. The effect of such rewards is to reduce the payoff fromopportunistic behavior. Third, Williamson (1975) acknowl-edges the possible effects of the organizational atmosphere,in which organizational culture and socialization processesmay create convergent goals between parties and reduceopportunism ex ante.

Although TCA's original framework poses the gover-nance question as a discrete choice between marketexchange and intemal organization, the current version ofthe theory explicitly acknowledges that features of intemalorganization can be achieved without ownership or completevertical integration. A variety of hybrid mechanisms havebeen identified in the literature, ranging from formal mecha-nisms, such as contractual provisions and equity arrange-ments (Joskow 1987; Osbom and Baughn 1990), to moreinformal mechanisms, such as infonnation sharing and jointplanning (Noordewier, John, and Nevin 1990, Palay 1984).

Transaction Cost Analysis:Empirical Research

This review provides an integration and synthesis of 45empirical TCA articles published from 1982 to 1996 in avariety of academic joumals in marketing, management,strategy, law, and economics. To identify articles for poten-tial inclusion in this review, we conducted a comprehensiveliterature search using electronic databases in business andsocial science (e.g., ABI/Inform, PsycLit), indices of keyacademic joumals (e.g., Joumai of Marketing, Journal ofLaw, Economics, and Organization), and bibliographiesfrom conceptual and empirical TCA articles. Our literaturesearch produced over 150 citations.^ In aggregate, we

^Because our objective is to provide a review of TCA articlesthat address issues of interest to marketing scholars, studies that areconcerned mainly with social (e.g., Treas 1993) or political institu-tions (e.g., Hennart and Anderson 1993), as well as those that focuson intraorganizational govemance (e.g., Balakrishnan and Fox1993), are not included here. Moreover, studies that draw on TCAreasoning but do not directly test TCA's framework (e.g., Dwyerand Oh 1988; Phillips 1982,) are not included. Finally, we omitcase studies (e.g., Goldberg and Erickson 1987), as well as exten-sions of prior work that do not add new theory or data (e.g., Joskow1990).

believe that our selection of articles provides a representa-tive, though not exhaustive, selection of empirical work onTCA that is of interest to marketing scholars."* A summary ofthe sample; focal variables, and key findings of these studiesis provided in Table 1. Our review centers around a set ofthree specific questions: (1) In what context has TCA beenapplied? (2) What methods have been used to investigateTCA? and (3) How valid is TCA's conceptual framework?

in What Contexts Has Transaction Cost AnalysisBeen Applied?

Drawing from its interdisciplinary origins in law, econom-ics, and organization, TCA explains a variety of problems ofeconomic organization, ranging from marriage (e.g., Treas1993) to intemational trade (e.g., Hennart and Anderson1993). As Williamson (1985, p. ix) notes, "Any problem thatcan be formulated, directly, or indirectly, as a contractingproblem can be investigated to advantage in transaction costterms." Transaction cost analysis's analytical diversity isclearly evident among the studies in our review, becausescholars in marketing and related disciplines have employedTCA to investigate a broad range of exchange-related issues.Specifically, these studies can be classified within one offour main contextual domains: (1) vertical integration, (2)vertical interorganizational relationships, (3) horizontalinterorganizational relationships, and (4) tests of TCA'sassumptions.

Vertical integration. The earliest (and most common)applications of TCA focus on the vertical integration deci-sion. These studies typically focus on a manufacturingfirm's decision to backward integrate into the supply ofmaterials or components or forward integrate into distribu-tion and sales. Monteverde and Teece (1982a) provide theseminal study in the context of backward integration byapplying TCA to examine the make-or-buy decision forassembly components for two firms in the U.S. automobileindustry. Masten, Meehan, and Snyder (1989) and Walkerand Weber (1984, 1987) also provide studies of componentsourcing among U.S. automobile manufacturers. This make-or-buy issue for production inputs has also been examinedby Balakrishnan and Wemerfelt (1986), Levy (1985),Lieberman (1991), Masten (1984), and Masten, Meehan,and Snyder (1991). Maltz extends the make-or-buyapproach by using TCA to examine the conditions underwhich a manufacturer would select in-house versus out-sourced shipping (Maltz 1993) and warehousing functions(Maltz 1994).

In terms of forward vertical integration, TCA studiesfocus on the integration by manufacturers into distributionin both domestic and intemational contexts. For example,John and Weitz (1988) use TCA to examine forward inte-gration into distribution and explore manufacturers' use ofdirect (i.e., through employees) versus indirect (i.e.,through commission agents) channels of distribution. In a

''Although we provide the most comprehensive review of theTCA framework as applied in a marketing context, several otherreviews are available in the literature (e.g.. Anderson 1996; Dayand Klein 1987; Joskow 1988; Lohtia, Brooks, and Krapfel 1994;Rangan, Corey, and Cespedes 1993; Shelanski and Klein 1995).

32 / Journal of Marketing, October 1997

TABLE 1Summary of Selected Transaction Cost Analysis Studies

Author(s) SampleIndependentVariable(s)

DependentVariable(s) Key Findings

Anderson (1985) 159 sales managers inthe electronic compo-nents industry

Asset specificity;Behavioral uncertainty;Environmental uncer-tainty; Interaction ofasset specificity x envi-ronmental uncertainty;Transaction frequency

Use of direct salesforce versus manufac-turers' representatives

Behavioral uncertaintyand the interaction ofasset specificity andenvironmental uncer-tainty are positivelyrelated to the use of anin-house sales force.

Two of seven measuresof asset specificity havea significant positiveeffect on sales forceintegration.

Anderson (1988) 169 sales managers inthe electronic compo-nents industry

Asset specificity; Envi-ronmental uncertainty;Behavioral uncertainty

Type of sales force;Degree of salespersongoal congruence; Moni-toring by sales man-ager

Level of salespersonopportunism

Level of salespersonopportunism

Higher levels of assetspecificity and behav-ioral uncertainty arepositively related tosalesperson oppor-tunism.

In-house salespersonsdisplay less oppor-tunism than do manu-facturer representa-tives.

Goal congruence isnegatively related tosalesperson oppor-tunism.

Anderson &Coughlan(1987)

94 foreign market entryventures by 36 U.S.semiconductor firms

Asset specificity Use of integrated orindependent channelfor foreign market entry

Asset specificity is posi-tively related to the useof an integrated channel.

Anderson &Schmittlein(1984)

145 sales managers inthe electronic compo-nents industry

Asset specificity; Envi-ronmental uncertainty;Behavioral uncertainty;Interaction of assetspecificity x environ-mental uncertainty;Interaction of assetspecificity x behavioraluncertainty; Transactionfrequency

Use of direct salesforce versus manufac-turers' representatives

Behavioral uncertaintyand asset specificityare positively related tothe use of an in-housesales force.

Anderson & Weitz(1992)

378 manufacturer-dis-tributor dyads amongfive Fortune 500 com-panies

Manufacturer idiosyn-cratic investments; Dis-tributor idiosyncraticinvestments; Percep-tions of manufactureridiosyncratic invest-ments; Perceptions ofdistributor idiosyncraticinvestments

Levels of manufacturerand distributor commit-ment to the relationship

Idiosyncratic invest-ments are positivelyrelated to tioth manu-facturer and distributorcommitment.

Manufacturer and dis-tributor perceptions ofthe other party's level ofcommitment are posi-tively related to per-ceived idiosyncraticinvestments.




Balakrishnan &Wemerfelt(1986)

93 manufacturingindustries

Technological uncer-tainty (i.e., obsoles-cence)

Degree of vertical inte-gration

Technological obsoles-cence has a negativeimpact on vertical inte-gration.

Bucklin & Sen-gupta(1993)

98 co-marketingalliances

Expected asset speci-ficity; Behavioral uncer-tainty; Transaction fre-quency

Level of power imbal-ance between focal andpartner firm

Expected transaction-specific investmentsand expected fre-quency of interactionare positively associ-ated with power imbal-ance.

Dutta & John(1995)

120 student subjectsplaying the role of elec-trical transformer sup-pliers

2444 semiconductordevices

Number of suppliers

Level of buyers' specificinvestments

Supplier's selling price

Single or multiple vendor

Sellers in a monopolycondition extract higherprices than sellers in aduopoly condition.

Devices that requirehigfi levels of specificinvestments by buyersare more likely to besupplied by multiplevendors.

Dutta and col-leagues (1995)

199 representativeagencies in the electric-technical and mecfiani-cal industries

f\/lanufacturer lock-in;Performance ambiguity

Single (i.e., representa-tive only) versus dualchannel (i.e., represen-tative and houseaccount) distributionsystems

Both lock-in and perfor-mance ambiguityincrease the probabilitythat a manufacturer willuse a dual channel.

Erramilli & Rao(1993)

381 foreign marketentry decisions of 175U.S. service firms

Asset specificity (i.e.,idiosyncratic services)

Shared versus full-con-trol modes of marketentry

Service firms favorshared control whenasset specificity is low.This tendency is mod-erated by country risk,firm size, and degree ofseparability of produc-tion and consumption.

Gates (1989) 52 semiconductor firmsacross North America,Europe, and Japan

Firm's product/marketstrategy

Perceived transactioncosts

Product/market strategycosts influence man-agerial perceptions ofselected types of trans-action costs.

Gatignon &Anderson(1988)

1267 foreign sub-sidiaries of 180 U.S.multinational corpora-tions

Asset specificity; Envi-ronmental uncertainty;Behavioral uncertainty;Interaction of assetspecificity x environ-mental uncertainty

Percent equity owner-ship of foreign sub-sidiary

Total versus partialownership of foreignsubsidiary

Behavioral uncertaintyis positively related tothe percent of equityownership.

Environmental uncer-tainty is negativelyrelated to the percentof equity ownership.

Total ownership is morelikely under conditionsof high asset specificity,high befiavioral uncer-tainty, and low environ-mental uncertainty.




Heide and John(1988)

199 manufacturers'agents in the electricaland process equipmentindustries

Asset specificity(invested by agency)

Level of offsettinginvestments by agency

Replaceability of theprincipal

Investment in specificassets by agents ispositively related totheir degree of offset-ting investments, andnegatively related totheir replaceability ofthe principal

Heide & John(1990)

155 manufacturingfirms across severalindustries

Asset specificity

Asset specificity; Envi-ronmental uncertainty(i.e., volume and techno-logical unpredictability)

Extent of joint actionbetween buyers andsuppliers

Degree of expectationsof relationship continuity

Asset specificity;Behavioral uncertainty

Level of supplier verifi-cation efforts

Both manufacturer'sand supplier's specificinvestments are posi-tively related to theextent of joint action.

Supplier's specificinvestments are posi-tively related to expec-tations of continuity,whereas technologicalunpredictability is nega-tively related to expec-tations of continuity.

Manufacturer's specificinvestments and behav-ioral uncertainty arepositively related to ver-ification efforts.

Heide & John(1992)

Hu & Chen(1993)

155 manufacturingfirms and 60 supplierfirms across severalindustries

1456 Chinese joint ven-tures

Asset specificity; Rela-tional norms

Environmental uncer-tainty (i.e., socioculturaldistance)

Level of buyer's controlover supplier decisions

Percentage of foreignownership of Chinesejoint venture

Investments in specificassets by buyers arepositively related tocontrol over supplierdecisions when bothparties share relationalnorms. In the absenceof these norms, specificassets are negativelyrelated to control oversupplier decisions.

Under conditions ofhigh sociocultural dis-tance, firm will seeklower percentages ofjoint venture ownership.

John (1984) 151 franchised dealersof a major oil company

Degree of poweremployed by franchisor(five different typesspecified); Degree ofbureaucratic structuring(three different dimen-sions specified)

Degree of opportunismdisplayed by franchiseddealers

Franchisee oppor-tunism is positivelyrelated to franchisor'suse of coercive powerand negatively relatedto franchisor's use ofreferent power.

Franchisee oppor-tunism is positivelyrelated to perceptionsthat franchisor employsa bureaucratic mode ofgovernance.




John & Weitz(1988)

88 manufacturers ofindustrial products

Asset specificity; Envi-ronmental uncertainty;Behavioral uncertainty

Percentage of manufac-turer's sales throughdirect distribution chan-nels

Asset specificity, envi-ronmental uncertainty,and behavioral uncer-tainty are positivelyrelated to manufac-turer's degree of for-ward vertical integrationinto distribution.

John & Weitz(1989)

161 manufacturers ofindustrial products

Salesperson replace-ability; Environmentaluncertainty; Behavioraluncertainty; Interactionof ability to salespersonreplaceability x environ-mental uncertainty

Percentage of salesper-son compensation paidin salary

Behavioral uncertaintyand salespersonreplaceability and/or itsinteraction with environ-mental uncertainty arepositively related to thepercentage of salarycompensation.

Joskow (1987)

Klein (1989)

Klein & Roth(1990)

Klein & Roth(1993)

277 contracts betweencoal suppliers and elec-tric utilities

338 Canadianexporters



Asset specificity

Asset specificity; Envi-ronmental uncertainty;Transaction frequency

Asset specificity

Environmental uncer-tainty; Ability to monitorchannel

Length of contractduration

Degree of vertical con-trol of export channel

Type of entry in foreignmarkets

Level of firm's satisfac-tion with existingchannel

The length of contractduration is positivelyrelated to asset speci-ficity.

Exporters faced withhigh levels of assetspecificity.uncertainty/complexity.and transaction fre-quency exert higherlevels of control in inter-national markets.

Asset specificity moder-ates the impact of expe-rience and psychic dis-tance on the type ofentry in foreign markets.

Lower levels of uncer-tainty and higher abilityto monitor are associ-ated with higher levelsof channel satisfaction.

Klein, Prazier, &Roth (1990)


Asset specificity; Envi-ronmental uncertainty

Level of channel inte-gration in foreign mar-i<ets

Asset specificity is posi-tively related to the levelof channel integration,whereas environmentaluncertainty has mixedresults on the level ofchannel integration.

Leffler & Rucker(1991)

153 timber harvestingcontracts

Buyer's presale mea-surement costs; seller'smonitoring costs

Lump-sum versus per-unit payment

When presale mea-surement costs are low,lump-sum contracts areused; when postsalemonitoring costs arelow, per-unit contractsare used.

Levy (1985) 69 manufacturing firms Asset specificity; Envi- Degree of vertical inte-in 37 industries ronmental uncertainty gration

Pirms with higher levelsof specific assets andenvironmental uncer-tainty are more verti-cally integrated.

36 / Journai of iUarketing, October 1997


DependentVariable(s) Key Fmdings

Lieberman (1991) 203 U.S. producers of34 chemical products

Supplier concentration;Asset specificity; Costof an upstream input

Backward integrationversus contractualarrangement for obtain-ing chemical products

Firms seek downstreamintegration to avoidlock-in due to specificassets; the higher thecost input, the higherthe probability of back-ward integration.

Maltz(1993) 138 shippers in a vari-ety of industries

Asset specificity; Envi-ronmental uncertainty;Behavioral uncertainty;Transaction frequency

Percentage of ship-ments delivered by pri-vate fleet

Only human specificassets are positivelyrelated to level of pri-vate fleet use.

Maltz(1994) 147 firms in a variety ofmanufacturing industries

Asset specificity; Trans-action frequency

Probability of outsourc-ing warehousing function

Specific assets arenegatively related tooutsourcing, whereasfrequency is positivelyrelated to outsourcing.

Masten(1984) 1887 components of anaerospace system

Asset specificity; Envi-ronmental Uncertainty(i.e., complexity)

Internal versus externalprocurement of compo-nents

Components requiringhigh amounts of speci-ficity and uncertaintyare more likely to beinternally produced.

Asset specificity anduncertainty interact tohave a multiplicativeeffect on the tendencyto produce a compo-nent internally.

Masten, Meehan,& Snyder(1989)

118 automotive compo-nents

Asset specificity Percentage of compo-nent needs producedwithin the firm

Only human-specificassets are positivelyrelated to the percent-age of components pro-duced within the firm.

Masten, Meehan,& Snyder(1991)

74 components for anaval ship building pro-ject

Asset specificity; Envi-ronmental uncertainty

Internal versus externalprocurement of compo-nents; Cost of internalorganization

Asset specificity andenvironmental uncer-tainty are positivelyrelated to internal pro-duction of components,but this effect is mainlydue to a reduction inthe cost of internalorganization.

Monteverde &Teece (1982a)

133 automotive compo- Asset specificitynents

Internal versus externalprocurement of compo-nent

Asset specificity is posi-tively related to auto-mobile manufacturers'internal production ofcomponents.

Monteverde &Teece (1982b)

28 components of amajor U.S. automotivesupplier

Valuequasi

of appropriablerents

Presence or absence ofquasi-vertical integration

The value of appropri-able quasi rents is posi-tively related to quasi-vertical integration.

Noordewier,John, & Nevin(1990)

140 manufacturingfirms who purchase balland roller bearings

Environmental uncer-tainty

Level of possessionand acquisition cost

Acquisition cost is low-ered under conditionsof uncertainty whenbuyers and sellersshare high levels ofrelational governance.


Author(s) SampleindependentVariable(s)


Osborn &Baughn (1990)

153 U.S.-Japanalliances

Environmental uncer-tainty; Intent to conductjoint Research andDevelopment

Joint venture versuscontractual agreement

Under conditions of highenvironmental uncer-tainty, alliances arelikely to be governed bycontractual agreements.

Intention to conductjoint Research andDevelopment is posi-tively related to jointventure formation.

Palay (1984) 51 transactionsbetween rail carriersand shippers

Asset specificity (i.e.,idiosyncratic investment)

Five elements of gover-nance structure

Transactions with idio-syncratic investmentsare likely to be gov-erned bilaterally amongthe exchange partners.

Parkhe(1993) 111 manufacturingfirms across a varietyof industries

Perceptions of oppor-tunistic behavior

History of cooperationbetween alliance part-ners

Length of time horizon;Alliance performance

Payoffs from unilateralcooperation; Length oftime horizon

Performance of strate-gic alliance; Level ofspecific investments;Level of contractualsafeguards

Perceptions of oppor-tunistic behavior

Level of specific invest-ment

Extent of contractualsafeguards

Perceptions of oppor-tunistic behavior arenegatively related toalliance performanceand the ievel of specificinvestments and con-tractual safeguards.

A history of cooperationis negatively related toperceptions of oppor-tunism.

Level of specific invest-ments is positivelyrelated to length of timehorizon and allianceperformance.

Extent of contractualsafeguards is nega-tively related to bothpayoffs from unilateralcooperation and lengthof time horizon.

Pilling, Crosby, &Jackson (1994)

229 purchasing person-nel from aerospace,electronics, anddefense firms

Asset specificity; Envi-ronmental uncertainty;Transaction frequency

Level of ex ante and expost transaction costs

Level of ex ante and ex Relational closenesspost transaction costs (six separate indicants)

Asset specificity is posi-tively related to both exante and ex post costs,environmental uncer-tainty is related to exante costs, and fre-quency is related toneither cost.

Transaction costsappear to mediate therelationship betweenTCA dimensions andrelational closeness.

Sriram, Krapfel, &Spekman(1992)

65 purchasing man-agers in a large manu-facturing firm

Asset specificity

Perceived transactioncosts

Perceived buyer depen-dence

Propensity to collabo-rate

Supplier-specific invest-ments are negativelyrelated to perceivedbuyer dependence.

Perceived transactioncosts are positivelyrelated to propensity tocollaborate.


Author(s) SampleindependentVariabie(s)


Stump & Heide(1996)

165 chemical manufac-turers

Asset specificity Partner qualification,incentive design, andmonitoring

Buyers protect specificinvestments throughpartner selection andsupplier-specific invest-ments.

Technological uncer-tainty

Partner qualification

Level of supplier-spe-cific investments

Degree of monitoring

Higher levels of uncer-tainty are negativelyrelated to supplier spe-cific investments.

More extensive supplierqualification reducesbuyer monitoring.

Walker & Poppo(1991)

99 supply relationshipsof a large U.S. manu-facturer

Asset specificity; Levelof market competition

Comparative transac-tion costs (supplied in-house or externally)

Asset specificity isassociated with lowertransaction costs withina firm than across firms.

Walker & Weber(1984)

60 make-or-buy deci-sions in a large U.S.automobile manufacturer

Level of market compe-tition; Environmentaluncertainty (i.e., tech-nological and volumeuncertainty)

Whether componentwas bought or made in-house

Make-or-buy decisionsare affected signifi-cantly by market com-petition and volumeuncertainty.

Walker & Weber(1987)

60 make-or-buy deci-sions in a large U.S.automobile manufac-turer

Level of market compe-tition; Environmentaluncertainty (i.e., tech-nological and volumeuncertainty)

Whether componentwas bought or made in-house

Make-or-buy decisionsare affected signifi-cantly by the interactionof market competitionand volume uncertainty.

Weiss & Ander-son (1992)

243 sales managers ofelectronic componentmanufacturers

Asset specificity (i.e.,idiosyncratic invest-ments); Behavioraluncertainty

Degree of manufacturerdissatisfaction with therepresentative

Manufacturer's likeli-hood of converting to adirect sales force

Idiosyncratic invest-ments by representa-tives reduces manufac-turer dissatisfaction.

Behavioral uncertaintyis positively related tomanufacturer's intentionto convert to a directsales force.

series of studies, Anderson and colleagues (Anderson 1985;Anderson and Schmittlein 1984; Weiss and Anderson 1992)use TCA to understand the factors leading manufacturingfirms to select integrated (i.e., house accounts) versus inde-pendent (i.e., manufacturers' representatives) sales forces.Dutta and colleagues (1995) provide an extension to Ander-son's work by examining how TCA influences firms toemploy simultaneously both house accounts and manufac-turers' representatives.

A related stream of TCA research in forward verticalintegration focuses on foreign market entry. For example,Anderson and Coughlan (1987) draw on TCA to examinethe use of integrated versus independent distribution chan-nels in foreign market entry ventures by U.S. semiconductorfirms. Similarly, Gatignon and Anderson (1988) employTCA to investigate the degree of control multinational cor-

porations exert over foreign subsidiaries in terms of level ofintegration. Klein and colleagues (Klein 1989; Klein, Fra-zier, and Roth 1990; Klein and Roth 1990, 1993) present aseries of TCA studies that explore the vertical control strate-gies of Canadian exporters. In their 1993 study, Klein andRoth make an important contribution by employing TCA tounderstand the factors leading to a firm's satisfaction withits intemational marketing channels. Other innovative TCAstudies in this context have investigated joint ventures incommunist China (Hu and Chen 1993) and the foreign mar-ket entry of service firms (Erramilli and Rao 1993).

Vertical interorganizational relationships. Closelyrelated to the studies of vertical integration is a diversestream of TCA research that focuses on how governanceproblems can be managed without common ownership (i.e..


complete integration). In one of the initial studies of"hybrid" govemance mechanisms, Monteverde and Teece(1982b) examine the antecedents of quasi-vertical integra-tion (i.e., the supplier makes the parts but the manufacturerowns the tools) in the U.S. automobile industry. Subse-quently, Heide and John (1988) suggest that manufacturers'representatives safeguard the assets they invest in their man-ufacturers by balancing their dependence through the estab-lishment of offsetting investments in their customer rela-tionships. In their study of relationships between manufac-turers and suppliers in the chemical industry. Stump andHeide (1996) investigate a variety of alternative govemancemechanisms, including partner selection, incentive design,and monitoring.

By far, the most frequently investigated hybrid form ofgovemance in the TCA literature is the development ofclose and enduring interorganizational ties (Macneil 1981).Heide and John (1990) use TCA to examine how buyersand suppliers use close relationships as a means of safe-guarding specific investments and adapting to uncertainty.In a related study, Heide and John (1992) explore the roleof relational norms as a moderator of the relationshipbetween specific assets and vertical control in buyer-sup-plier relations. The utility of relational ties as a govemancestructure also has been investigated by Pilling, Crosby, andJackson (1994), Noordewier, John, and Nevin (1990), Sri-ram, Krapfel, and Spekman (1992), and Walker and Poppo(1991). In addition, Anderson and Weitz (1992) explore therole of pledges in building commitment within manufac-turer-distributor relationships.

As a final element of the vertical interorganizationalrelationship context, economists and legal scholars havedeveloped a rich stream of research exploring the use ofcontractual arrangements. Although these studies fall out-side the marketing literature, they provide important appli-cations of TCA by investigating long-term, bilateralexchange relationships. In one of the best-known studies inthis domain, Joskow (1987) investigates the role of assetspecificity in determining the length of contracts betweencoal suppliers and electric utilities. Other important contrac-tual-based TCA studies include Leffier and Rucker (1991)and Palay (1984).

Horizontal interorganizational relationships. AlthoughTCA scholars have traditionally focused on vertical rela-tionships, a growing number of studies have used TCA tounderstand and explain a variety of relationships betweenfirms at the same point in the value chain. Gates (1989) con-

. tributed the first TCA study in the horizontal interorganiza-tional relationship context with his analysis of technologicalcooperation in the semiconductor industry. Specifically,-heexamines the extent to which a fimi's strategic orientationalters a manager's perceptions of the transaction costs asso-ciated with interfirm cooperation. In a later but better-knownstudy, Bucklin and Sengupta (1993) explore the role of assetspecificity, uncertainty, and frequency on power imbalancesin co-marketing alliances. Other studies in this domaininclude Obsbom and Baughn (1990) and Parkhe (1993).

Tests of transaction cost analysis's assumptions. As afinal context, our review includes a few studies that have

investigated the validity of TCA's assumption. Specifically,John (1984) views opportunism as an endogenous variablein need of explanation and investigates the degree of oppor-tunistic behavior that is displayed by the franchised dealersof a major oil company as a result of a power and bureau-cratic stmcture. Likewise, Anderson (1988) studies theantecedents of opportunistic behavior among salespeople inthe electronic components industry.^

What Methods Have Been Used to InvestigateTransaction Cost Analysis?

In addition to its contextual diversity, the TCA literature alsodisplays a substantial degree of methodological diversity.We highlight important methodological issues and summa-rize the data collection and measurement approachesemployed in the TCA literature.

Data collection. Among the studies in our review, themost common means of data collection are mail surveys.These surveys are usually directed to midlevel executives atlarge U.S. manufacturing firms or to their channel partners.These key informants usually have a functional responsibil-ity for some element of channel operations, either as pur-chasing managers (e.g., Heide and John 1990, 1992;Noordewier, John, and Nevin 1990), sales managers (e.g.,Anderson 1985, 1988; John and Weitz 1988, 1989), or man-ufacturers' agents (e.g., Dutta et al. 1995; Heide and John1988).

Although survey research appears to be the data collec-tion mode of choice, a sizable number of TCA studies (espe-cially those outside of marketing) use secondary data col-lection techniques. For example, Gatignon and Anderson(1988) obtained secondary data on 1267 foreign subsidiariesof 180 U.S. multinational corporations through the HarvardMultinational Enterprise Project. Similarly, Hu and Chen(1993) gathered data on the ownership structures of 1456Chinese joint ventures from The Chinese Investment Guide.Other secondary data sources used by TCA researchersinclude the Census of Manufacturers (Levy 1985), the AsianWall Street Journal (Osbom and Baughn 1990), industrytrade publications (Lieberman 1991), and archival data fromthe National Science Foundation (Anderson and Coughlan1987). Compared to survey data, these secondary data pub-lications typically provide much larger sample sizes.

In addition to these secondary publications, another richsource of secondary data frequently employed by econo-mists and legal scholars comes from contractual agreementsbetween exchange partners. For example, Leffier andRucker (1991) collect information from 188 timber harvest-ing contracts through interviews with key informants in thetimber industry. Palay (1984) employs a similar method inhis study of contractual transactions between rail freight car-riers and shippers. In contrast to these two studies, Joskow(1987) uses a database of actual contracts between coal sup-pliers and electrical utilities. To facilitate this type ofresearch, a depository of interorganizational contracts, the

interesting recent work has also begun to explore theantecedents of TCA's other variables, such as asset specificity (e.g.,Bensaou and Anderson 1997).


Center for Contracts and the Structure of Enterprise at theUniversity of Pittsburgh, has been established and is avail-able for public use. Along with secondary publications,these contractual records provide an excellent means ofgathering data for historical TCA-related research.

The most recent data collection innovation in TCAresearch is the use of experimental methodology. For exam-ple. Pilling, Crosby, and Jackson (1994) employ a 2 x 2 x 2between-groups factorial design in which they manipulatetwo levels of asset specificity, uncertainty, and frequency byusing a role-playing scenario. They then assess the impact ofthese manipulated factors on perceived transaction costsamong a group of 229 purchasing managers. In a relatedexperimental investigation, Dutta and John (1995) use stu-dent subjects to assess the degree to which technology licens-ing by suppliers acts as a safeguard for buyers' specificinvestments by restraining their trading partner's opportunis-tic behavior (i.e., price hikes). In addition to their experi-mental investigation, Dutta and John also collect secondarydata on actual firm behavior. This type of multimethodapproach is promising for future TCA investigations.

Measurement. Because of its contextual and method-ological diversity, the empirical TCA literature presents ahost of measurement-related issues for potential analysis.We focus our discussion on issues related to the opera-tionalization of TCA constructs. These issues are especiallyimportant for future TCA investigators, because many of thestudies in our review have faced measurement-related diffi-culties. Specifically, our discussion addresses the opera-tionalization of TCA's key dependent (i.e., governancestructure) and independent (asset specificity, environmentaluncertainty, and behavioral uncertainty) constructs.

I. Governance structures. As was noted previously,TCA researchers have conceptualized three general types ofgovernance structures: market, hierarchy, and various hybridor intermediate mechanisms. In general, the studies in ourreview that attempt to measure markets versus hierarchiesemploy empirical operationalizations, which bear close cor-respondence to the construct's conceptual domain. Forexample. Walker and Weber's (1984, 1987) comparison ofassembly components purchased by an outside supplier ver-sus those produced in-house appears to align closely withthe market versus hierarchy construct. Masten (1984), Mas-ten, Meehan, and Snyder (1991), Monteverde and Teece(1982a), and Walker and Poppo (1991) employ a similarmeasure. Another example of a measure that appears to tapthe market versus hierarchy construct is the manufacturers'representatives versus direct sales force operationalizationfound in Anderson's (1985) and Anderson and Schmittlein's(1984) studies.

The TCA literature also contains several studies that usecontinuous measures of the market versus hierarchy con-struct. For example, Balakrishnan and Wemerfelt (1986)specify governance structure as the degree of vertical inte-gration, ranging from 0% to 100%. Other examples of thistype of continuous conceptual operationalization (from mar-ket to hierarchy) include Gatignon and Anderson's (1988),Hu and Chen's (1993), John and Weitz's (1988), Klein's(1989), Levy's (1985), Maltz's (1993, 1994), and Masten,

Meehan, and Snyder's (1989) studies. One specification thatseems somewhat problematic is the assessment of the degreeof vertical integration as the ratio of value added to sales,which both Balakrishnan and Wemerfelt (1986) and Levy(1985) employ. As Balakrishnan and Wemerfelt (1986)acknowledge, this type of measure is distorted by differ-ences in profitability among industries.

As would be expected, empirical operationalizations ofhybrid or intermediate forms of govemanee come in a vari-ety of forms. For example, Klein, Frazier, and Roth (1990)specify the use of joint ventures to enter foreign markets asa hybrid mode of govemanee falling in between merchantdistributors (i.e., market) and a foreign sales subsidiary (i.e.,hierarchy). Other researchers use similar operationalizationsof govemanee stmcture (e.g., Erramilli and Rao 1993;Osbom and Baughn 1990). Some studies include measuresof hybrid forms of govemanee, which more directly tap theprocesses represented by this type of govemanee structure.For example, Palay (1984) measures relational contractingas a hybrid mechanism goveming relations between rail car-riers and shippers by assessing five elements of their con-tractual relationships (i.e., means of enforcement, adapta-tions to changed circumstances, types of adjustments, andpresence of long range and structural planning). Anotherexample of a hybrid govemanee mechanism is Heide andJohn's (1990) measure of bilateral governance, whichassesses the degree of joint action, continuity, and qualifica-tion efforts in buyer-supplier relationships.

Recently, an even broader range of govemanee mecha-nisms has been identified. For example. Stump and Heide(1996) examine how buyers safeguard their specific assets(invested in sellers) through sueh control mechanisms aspartner selection, incentive design, and monitoring. Like-wise, Parkhe (1993) studies the impact of opportunisticbehavior on the level of contractual safeguards in strategicalliances. Other studies that focus on safeguarding-relatedissues include Anderson and Weitz (1992), Dutta and John(1995), and Heide and John (1988, 1992).

2. Asset specificity. Asset specificity refers to the trans-ferability of the assets that support a given transaction(Williamson 1985). Assets with a high amount of specificityrepresent sunk costs that have little value outside of a par-ticular exchange relationship. Williamson (1991b) has iden-tified six main types of asset specificity: (1) site specificity,(2) physical asset specificity, (3) human asset specificity, (4)brand name capital, (5) dedicated assets, and (6) temporalspecificity. We focus on human speeifie assets, because theyrepresent the type of asset specificity most commonlyassessed in both the empirical studies included in our reviewand TCA applieations in general (Lohita, Brooks, andKrapfel 1994). There are at least two reasons behind its pop-ularity: First, many TCA studies involve contexts in whichhuman investments represent a substantial and importantcost of doing business (e.g., sales, purchasing). Second,human specific assets lend themselves to a wide variety ofmeasurement approaches, both directly through secondarydata sources, such as sales reports, and indirectly throughsurvey instruments.


Transaction cost analysis researchers typically treathuman asset specificity as a latent construct and assess itusing multi-item scales. The most commonly used measureof human asset specificity is Anderson's (1985, 1988) ten-item company nature scale. This scale "reflects how neces-sary it is for salespeople to forge working relationships withthe firm in order to be effective and how much salespeoplemust leam" (Anderson 1985, p. 243). Variations of this mea-sure also have been successfully employed by Anderson andSchmittlein (1984), Heide and John (1988, 1990, 1992),John and Weitz (1989), Klein (1989), Klein and Roth(1990), Klein, Frazier, and Roth (1990), Maltz (1993, 1994),Stump and Heide (1996), and Weiss and Anderson (1992).Across all of these studies, this measure consistently demon-strates high levels of unidimensionality and intemal consis-tency. Furthermore, this measure appears to have an accept-able degree of convergent and discriminant validity (forvalidity test infonnation, see Heide and John 1990; Klein,Frazier, and Roth 1990).

Other multi-item measures that focus on human assetspecificity and appear to display reasonable intemal consis-tency can be found in Anderson and Coughlan's (1987),Erramilli and Rao's (1993), and Sriram, Krapfel, andSpekman's (1992) studies. A few TCA studies employ sin-gle-item measures of either human specific assets (e.g.,Bucklin and Sengupta 1993; John and Weitz 1988; Walkerand Poppo 1991) or asset specificity in general (e.g., Parkhe1993). For example, John and Weitz (1988) measure humanasset specificity by using a single item that assesses thelength of time a newly hired salesperson would need tobecome familiar with the firm's products and customers.

Although human asset specificity is typically measuredthrough some form of survey instmment, many studiesassess this construct through secondary data indicants. Forexample, Monteverde and Teece (1982a) assess human assetspecificity by obtaining engineering cost ratings for auto-mobile components. Studies by Masten and colleagues fol-low a similar approach (i.e., Masten 1984; Masten, Meehan,and Snyder 1989, 1991). Indicants such as these provideonly an approximate specification of the construct, whichleads to potential construct validity problems. However,given the constraints of secondary data, more direct mea-sures may not be available. In such situations, multimethodapproaches may be needed to establish construct validityprior to testing substantive hypotheses.

3. Environmental uncertainty. As is theorized in the TCAliterature, environmental uncertainty refers to "unantici-pated changes in circumstances surrounding an exchange"(Noordewier, John, and Nevin 1990, p. 82). Among all theTCA constructs, environmental uncertainty seems to be themost problematic from a measurement standpoint. Specifi-cally, there appear to be two competing operationalizationsof this construct. The most commonly held perspectiveemphasizes the unpredictable nature of the extemal environ-ment, whereas the second view examines both unpre-dictability and complexity.

The most popular operationalization of environmentaluncertainty focuses on the unpredictability of the environ-ment. Forexample, Anderson (1985, 1988), uses a nine-itemscale that addresses elements related to both the instability

associated with environmental turbulence (e.g., complexity,volatility) and the dangers of venturing into new activities(e.g., new markets, new sales). Heide and John (1990) alsoconceptualize environmental uncertainty as unpredictability,but differ from Anderson in their operationalization by spec-ifying two different types of unpredictability, volume andtechnological. Heide and John's (1990) technological unpre-dictability scale is also employed by Stump and Heide(1996). John and Weitz (1989) and Noordewier, John, andNevin (1990) use similar measures of the unpredictabilityaspect of environmental uncertainty.

The opposing view of environmental uncertainty comesfrom Klein and colleagues (Klein 1989; Klein, Frazier, andRoth 1990). These scholars operationalize environmentaluncertainty as a two-dimensional concept that entails ele-ments of both unpredictability and changeability. Moreover,they suggest that these two types of uncertainty have oppos-ing influences on govemance stmctures. Specifically, theyposit that whereas unpredictability encourages firms to formhierarchical mechanisms, changeability has just the oppositeeffect. For example, Klein (1989) distinguishes betweendynamism and complexity as elements of environmentaluncertainty. He defines uncertainty-dynamism as "the rate atwhich changes in the environment occur," and uncertainty-complexity as "the degree to which the respondent per-ceived the environment as simple or complex" (p. 257).

Having reviewed both of these two altemative conceptu-alizations of environmental uncertainty, the obvious ques-tion is. Which provides the appropriate conceptual domainfor further TCA investigations? Ultimately, the answer mustbe made on theoretical grounds. If a researcher has reason toexpect that key elements of the extemal environment couldpossibly act as a disincentive for hierarchical modes of gov-emance, a multidimensional operationalization such asKlein's (1989) may be in order. In the absence of such a the-oretical supposition, the traditional unpredictability opera-tionalization may be sufficient. Another important point ofconsideration is the study context. For example, though thetraditional unpredictability view of environmental uncer-tainty has commonly been employed in a domestic chan-nel-relations context (e.g., Anderson 1985; Heide and John1990), in which complexity is likely to be manageable, thecontext for Klein's (1989) and Klein, Frazier, and Roth's(1990) studies concems foreign market entry decisions, inwhich complexity is likely to be a much greater concem.

In addition to these multiple-item measures, a few stud-ies also have assessed the environmental uncertainty con-stmct through single-item measures (e.g., Anderson andSchmittlein 1984; Masten 1984; Masten, Meehan, and Sny-der 1991). For example, Anderson and Schmittlein (1984, p.391) measure uncertainty as the "expected deviationbetween forecast and actual sales." Masten (1984) and Mas-ten, Meehan, and Snyder (1991) employ a more question-able approach by asking survey respondents to classify com-ponents into dichotomous categories on the basis of theircomplexity.

Finally, environmental uncertainty also claims a widevariety of conceptual and empirical operationalizationsamong TCA scholars who employ secondary data sources.For example, Osbom and Baughn (1990) focus on techno-


logical intensity as indicated by size of research and devel-opment-to-sales ratios. Other secondary indicants of envi-ronmental uncertainty include Levy's (1985) use of stockmarket retums as an indicant of unanticipated events andGatignon and Anderson's (1988) classification of countryrisk as an indicant of unpredictability.

4. Behavioral uncertainty. Transaction cost analysisviews behavioral uncertainty as arising from the difficultiesassociated with monitoring the contractual performance ofexchange partners (Williamson 1985). Compared to bothasset specificity and environmental uncertainty, behavioraluncertainty has far fewer operationalizations. Thus, ourassessment of this construct and its measurement is rela-tively straightforward.

Most of the studies in our review conceptualize behav-ioral uncertainty as the degree of difficulty associated withassessing the perfonnance of transaction partners. This con-ceptualization appears to bear a close resemblance toWilliamson's (1985) theoretical discussion of behavioraluncertainty. Once again, we see that many studies employoperationalizations that build on the work of Anderson(1985). Anderson views behavioral uncertainty as synony-mous with the difficulty of evaluating (sales force) perfor-mance and assesses this construct with a seven-item scale,focusing on such factors as the degree of team sales and theaccuracy of sales records. Anderson (1988) and Andersonand Schmittlein (1984) use variations of this measure. Sev-eral other studies use similar types of measures and concep-tualize behavioral uncertainty as fundamentally an issue ofperfonnance assessment (e.g., Heide and John 1990; Johnand Weitz 1989; Stump and Heide 1996; Weiss and Ander-son 1992).

Similar to both of the other two TCA dimensions, a fewstudies in our sample employ single-item measures ofbehavioral uncertainty. For example, Anderson and Schmit-tlein (1984) measure behavioral uncertainty as a single-itemmeasure relating to the perceived difficulty of equitablymeasuring the results of individual salespeople. Bucklin andSengupta (1993) and John and Weitz (1988) also use single-item behavioral uncertainty measures. In contrast to assetspecificity and environmental uncertainty, there appear to befew secondary measures of behavioral uncenainty. Admit-tedly, such measures might be difficult to extract from sec-ondary data sources. Among the studies in our review,Gatignon and Anderson's (1988) use of the level of intema-tional experience as a proxy for performance assessment ina foreign market entry context is the only secondary study toassess this constmct.

5. General measurement-related concerns. Having com-pleted this summary of the conceptualization and measure-ment of each element of the TCA framework, we nowemphasize a few key points and express some general mea-surement-related concems. First, as can be seen from theprior discussion, there appears to be a reasonable degree ofconsistency in the conceptualization and measurement ofthe TCA framework. Specifically, several studies build onthe early work of Anderson (1985, 1988) in developing con-ceptual and empirical operationalizations of govemancestructure, asset specificity, environmental uncertainty, and

behavioral uncertainty. Thus, TCA research appears to haveanswered Day and Klein's (1987, p. 54) call to develop mea-sures "that build on previous operationalizations."

Finally, we recognize one recent measurement develop-ment. In contrast to the typical approach of assessing thealignment between govemance stmcture and transactiondimensions, a small but growing number of TCAresearchers have attempted to measure transaction costsdirectly. This approach is capable of providing both a moredirect test of TCA reasoning and an assessment of its nor-mative implications. For example. Pilling, Crosby, and Jack-son (1994) develop a 20-item measure of anticipated trans-action costs that focus on ex ante costs of developing a rela-tionship and ex post costs of monitoring perfonnance anddealing with opportunistic behavior. Other measures or indi-cants of perceived or actual transaction costs can be found inGates's (1989), Leffler and Rucker's (1991), Noordewier,John, and Nevin's (1990), Sriram, Krapfel, and Spekman's(1992), and Walker and Poppo's (1991) studies.

How Vaiid is Transaction Cost Anaiysis'sConceptuai Frameworii?

We provide an assessment of the validity of the TCA frame-work by synthesizing the key findings of the studies wereview in terms of govemance problems, their antecedentconditions, and the govemance mechanisms used to managethem.

Safeguarding problem. A safeguarding problem ariseswhen a firm deploys specific assets and fears that its partnermay opportunistically exploit these investments. Thus, theantecedents of the safeguarding problem are opportunismand asset specificity. Among the studies in our review, safe-guarding is the most commonly examined govemance prob-lem. These studies provide considerable support for TCA'shypothesized effects of specific assets and mixed support forits assumption about the existence of opportunistic actors.

Support for the role of opportunism comes from arecent lab study by Dutta and John (1995). This studyreveals that a supplier that controls a market with a monop-oly position is more likely to engage in price hikes than asupplier that shares the market with another supplier. Thus,this study lends support to Williamson's (1985) propositionthat small-numbers bargaining leads to opportunisticexploitation. Additional support for opportunism comesfrom Anderson (1988), who finds that a direct sales forcedisplays less opportunistic behavior than do manufacturers'representatives.

Somewhat contradictory evidence regarding the role ofopportunism is also available among the studies in ourreview. In his examination of opportunistic behavior ininterfirm relationships, John (1984, p. 287) reaches the fol-lowing conclusion:

It appears that opportunism can be viewed usefully as anendogenous variable that is evoked by certain antecedentswithin a long-run relationship. In other words, individualsmay not always behave opportunistically even if condi-tions permit such behavior. Refusals to honor agreementsand misrepresentation of intentions cannot be taken forgranted. Rather, they are induced by certain other factors.


In accordance with John's (1984) contention, Palay (1984)finds that idiosyncratic investments in rail freight relation-ships often lead to the development of tmst betweenexchange parties. Finally, in his study of strategic alliances,Parkhe (1993) finds that opportunistic behavior amongalliance partners is commonly attenuated by a history ofprior cooperation.

Although the literature is mixed regarding the extent ofopportunism in exchange relationships, it appears thatwhen opportunism is present, it has a negative impact onperfonnance. For example, Parkhe (1993) finds that oppor-tunistic activities by a strategic alliance partner diminishesalliance performance. Indirect evidence of the perfor-mance-diminishing effects of opportunism comes fromPilling, Crosby, and Jackson (1994), who show that highlevels of opportunism weaken the relational focus betweenbuyers and suppliers.

Transaction cost analysis proposes that, because of theopportunistic behavior of trading partners, high levels ofasset specificity increase the costs of safeguarding contrac-tual agreements. The few studies in our review that try tomeasure actual or perceived transaction costs provide sup-port for this proposition. For example, in their experimentalstudy. Pilling, Crosby, and Jackson (1994) find that assetspecificity has a significant positive impact on both ex anteand ex post transaction costs. Likewise, Walker and Poppo(1991) find that specific assets devoted to profit center trans-actions within a firm lead to lower transaction costs com-pared to specific assets invested in extemal suppliers.

When faced with the need to safeguard specific assetsinvested in an exchange relationship, early TCA workclaimed that a firm generally seeks to minimize its transac-tion costs tbrough vertical integration (Williamson 1985).This claim is broadly supported by the articles in our review.For example, several studies of the make-or-buy decision forproduction components find that parts requiring high levelsof specific investments are more likely to be intemally pro-duced than extemally sourced (Masten 1984; Masten, Mee-han, and Snyder 1989, 1991; Monteverde and Teece 1982).Likewise, Lieberman (1991) finds that the threat of lock-indue to specific investments is positively related to backwardintegration by chemical manufacturers. High levels ofinvestment in specific assets also are related positively to afirm's probability of integrating both its warehousing andshipping functions (Maltz 1993, 1994).

Other evidence for the use of vertical integration as asafeguard for specific assets comes from several studies offoreign market entry, which find that asset specificity isrelated positively to the use of higher levels of control in for-eign markets (Anderson and Coghlan 1987; Erramilli andRao 1993; Gatignon and Anderson 1988; Klein 1989; Klein,Frazier, and Roth 1990; Klein and Roth 1990). Likewise, ina domestic context, there is widespread support for the inte-gration of the personal selling function under conditions ofhigh asset specificity (Anderson 1985, 1988; Anderson andSchmittlein 1984; John and Weitz 1988). Other examples ofpositive relationships between specific assets and verticalintegration are provided by both Levy (1985) and Walkerand Poppo (1991).

As was noted previously, recent work in TCA theory(e.g., Williamson 1991b, 1996) suggests that firms can safe-guard their specific assets through a wide range of hybridgovemance mechanisms, such as pledges and bilateral con-tracting. These hybrid govemance modes fall into two gen-eral categories. One maintains a discrete separation betweenthe exchange panies and enforces agreements through con-tractual authority. The other fosters closer ties betweenexchange partners and enforces agreements through appealsto common interests. Following Heide's (1994) recent typol-ogy of govemance structures, we respectively refer to thesetwo types of hybrid mechanisms as unilateral and bilateral.Both types of govemance structures are altematives to mar-ket transactions and vertical integration for presenting viablesafeguarding mechanisms.

Unilateral hybrid govemance mechanisms provide a wayto safeguard specific assets by solidifying ex ante agree-ments with an exchange partner. For example, faced with ahigh degree of site specificity, coal suppliers that are "mine-mouthed" next to an electrical utility plant safeguard theirspecific assets by entering long-term contractual anange-ments (Joskow 1987). Similarly, Bucklin and Sengupta(1993) find that under conditions of high levels of specificinvestments, co-marketing alliance partners reduce powerimbalances through formal contracts that build exit barriers,exclusive dealing, and financial incentives into the relation-ship. Other examples of how unilateral hybrid mechanismscan solidify an ex ante agreement can be seen in Monteverdeand Teece's (1982b) and Stump and Heide's (1996) studies.

In contrast to the unilateral mechanisms, bilateral hybridgovemance stmctures appear to provide a firm with a way tosafeguard its specific assets by developing closer ties withits exchange partners. For example, Heide and John (1990)find that suppliers that have specific assets invested in amanufacturer establish close ties with that manufacturer bymeans of joint action and expectations of continuity. In arelated study, Heide and John (1992) show that relationalnorms (i.e., flexibility, infonnation exchange, and solidarity)are present in buyer-supplier relationships and enable buy-ers to protect their specific investments by gaining controlover supplier decision making, thus reducing the hazards ofopportunism. Support for the development of relationalnorms also can be found in Anderson and Weitz's (1992)and Palay's (1984) studies.

In summary, though TCA's assumption of opportunismreceives mixed support from the studies in our review, theuse of govemance in general and vertical integration in par-ticular as a means of safeguarding specific assets is broadlyconfirmed. Empirical applications of TCA clearly show thatmany firms attempt to safeguard their specific assets frompossible opportunistic behavior through vertical integration.However, these studies also demonstrate that in addition tovertical integration, firms can protect their specific assets bypursuing a variety of unilateral and bilateral hybrid gover-nance mechanisms, such as quasi integration, selection pro-cedures, and the development of relational norms.

Adaptation problem. An adaptation problem is createdwhen a firm whose decision makers are limited by boundedrationality has difficulty modifying contractual agreements


to changes in the external environment. Thus, theantecedents of the adaptation problem are bounded rational-ity and environmental uncertainty. Because none of the stud-ies in our review explicitly assesses bounded rationality, wefocus our discussion on environmental uncertainty. Overall,these studies present mixed support for TCA's hypothesizedeffects of environmental uncertainty.

According to TCA, high levels of environmental uncer-tainty increase the costs of adapting contractual agreements.Only one study in our review explicitly assesses the impactof environmental uncertainty on transaction costs (Pilling,Crosby, and Jackson 1994). In this study. Pilling, Crosby,and Jackson fmd that environmental uncertainty has a sig-nificant positive effect on the ex ante costs of developing anexchange relationship but has no effect on the ex post costsof activity monitoring. Klein and Roth (1993) provide indi-rect support for the impact of environmental uncertainty ontransaction costs by finding that firms facing lower levels ofenvironmental uncertainty exhibit higher levels of satisfac-tion with their channel partners than firms facing higher lev-els of environmental uncertainty. Williamson (1985) positsthat, when faced with the need to adapt to an uncertain envi-ronment, a firm will seek to minimize its transaction coststhrough vertical integration. This proposition gamers onlypartial support from the TCA studies included in our review.Specifically, though some researchers find TCA's antici-pated effects of environmental uncertainty, others fmd noeffects of environmental uncertainty, and still others findthat some types of environmental uncertainty actually act asa disincentive to vertical integration.

Compared to asset specificity, the studies in our reviewprovide limited support for TCA's hypothesized effects ofenvironmental uncertainty. Only a few of the studies thatmeasure environmental uncertainty find it positively relatedto either vertical integration or hybrid forms of govemance.For example. Levy (1985) finds that manufacturing firmswith high levels of environmental uncertainty exhibit higherlevels of vertical integration compared to firms with lowerlevels of uncertainty. Similarly, John and Weitz (1988) showthat environmental uncertainty is related positively to for-ward vertical integration among manufacturers of industrialproducts. Masten (1984) finds that, when faced with highlevels of environmental uncertainty, manufacturers are morelikely to produce an assembly component intemally than topurchase it from an extemal supplier.

In contrast to the studies described previously, manyother TCA applications are considerably less sanguine intheir support for TCA's hypothesized effects of environmen-tal uncertainty. For example, Anderson and Schmittlein(1984) and Maltz (1994) fmd that environmental uncertaintyhas no significant impact on vertical integration. Other stud-ies suggest that environmental uncertainty has a positiveimpact on vertical integration, but only through its interac-tion with other transaction-related factors, such as assetspecificity (Anderson 1985) or the level of market competi-tion (Walker and Weber 1987). Still other studies find thatthe relationship between environmental uncertainty and ver-tical integration may be nonmonotonic (Klein, Frazier, andRoth 1990; Masten, Meehan, and Snyder 1991). Finally,many studies suggest that environmental uncertainty may be

multidimensional and that different dimensions may havedifferent effects.

Walker and Weber (1984) were the first TCA researchersto uncover the multidimensional nature of environmentaluncertainty. They find that though high levels of volumeuncertainty influenced an automobile manufacturer to makerather than buy a component, technological uncertainty hadno impact on make-or-buy decisions. Heide and John (1990)fmd that technological unpredictability decreases expecta-tions of relationship continuity, whereas volume unpre-dictability has no impact on continuity expectations inbuyer-supplier relationships. Heide and John (1990) suggestthat this negative impact of technological unpredictabilityresults from the fear of being locked into a technology thatmay become obsolete. Likewise, Balakrishnan and Wemer-felt (1986) find that uncertainty in the form of technologicalobsolescence has a negative impact on vertical integrationby manufacturers. Finally, Stump and Heide (1996) showthat technological uncertainty decreases a supplier's will-ingness to invest in buyer-specific assets.

In addition to the fear of technological obsolescence, thedangers associated with operating in unfamiliar or quicklychanging environments also appear to act as disincentivesagainst vertical integration. For example, Klein (1989)shows that high levels of environmental complexity encour-age exporters to exert higher levels of vertical control in for-eign markets, whereas environmental dynamism (i.e., therate of change) encourages exporters to exert lower levels ofcontrol. Likewise, Klein, Frazier, and Roth (1990) find thatthe presence of multiple sources of uncertainty in the envi-ronment (i.e., diversity) increases the likelihood of serving aforeign market through the use of extemal agents or distrib-utors. The negative impact of environmental uncertainty onforeign market investment also is seen in Gatignon andAnderson's (1988), Hu and Chen's (1993), and Osbom andBaughn's(1990) studies.

In summary, the role of govemance as a means of adapt-ing to uncertain environments receives mixed support fromthe studies in our review. Although a few TCA researchersfmd that environmental uncertainty is positively associatedwith vertical integration, a greater number of researchersshow that, in some contexts, environmental uncertaintyeither has no impact on vertical integration or acts as a dis-incentive against integration. Environmental uncertainty is amultidimensional construct, and firms are hesitant to adopta hierarchical govemance structure when this uncertaintyentails risks of either unfamiliar operating environments ortechnological obsolescence.

Performance evaluation problem. A performance evalu-ation problem arises when a firm whose decision makers arelimited by bounded rationality has difficulty assessing thecontractual compliance of its exchange partners. Thus, theantecedents of the performance evaluation problem arebounded rationality and behavioral uncertainty. Becausenone of the studies in our review explicitly assesses boundedrationality, we focus our discussion on behavioral uncer-tainty. Although performance evaluation is the least com-monly investigated govemance problem, several studies in


our review provide considerable support for TCA's hypoth-esized effects of behavioral uncertainty.

Transaction cost analysis claims that high levels ofbehavioral uncertainty increase the costs of evaluating theperfonnance of exchange partners. Unfortunately, none ofthe studies in our review formally tests the relationshipbetween behavioral uncertainty and transaction costs.Assuming that such a relationship exists, Williamson (1985)claims that firms try to minimize the costs of evaluating theperfomiance of their exchange partners through the mecha-nism of vertical integration. This assertion receives strongsupport from the empirical TCA studies in our review.

A series of studies by Anderson and colleagues showthat behavioral uncertainty is positively related to a manu-facturer's decision to employ a direct sales force rather thanmanufacturers' representatives (Anderson 1985; Andersonand Schmittlein 1984; Weiss and Anderson 1992). Further-more, both Anderson (1985) and Anderson and Scbmittlein(1984) examine the full TCA model (i.e., asset specificity,environmental uncertainty, behavioral uncertainty, and fre-quency) and find that behavioral uncertainty produces tbestrongest effect sizes among all four dimensions. BothGatignon and Anderson (1988) and John and Weitz (1988)provide additional support for the positive relationshipbetween behavioral uncertainty and vertical integration.

In addition to fostering higher levels of vertical integra-tion, firms attempt to reduce the performance evaluationcosts associated with behavioral uncertainty through theuse of hybrid governance mechanisms. For example, Heideand John (1990) show that behavioral uncertainty faced bymanufacturers is positively related to the degree to whichthey seek supplier qualification through such activities asevaluating the supplier's engineering and manufacturingcapabilities.

In summary, though none of the studies in our reviewtests either the assumption of bounded rationality or the

relationship between behavioral uncertainty and transactioncosts, TCA's claim tbat firms employ vertical integration asa means of easing the burden of perfonnance evaluation isbroadly supported. Empirical applications of TCA clearlyshow that firms attempt to manage the perfonnance evalua-tion problem through both vertical integration and hybridgovernance structures.

Theoretical Questions andFurther Research

As can be seen from the preceding review, TCA research isfaced with several unanswered questions. In this section, weconsider these questions in conjunction with some recentcritiques of TCA to identify key issues for funher research.In particular, we focus on (1) the concept of transactioncosts, (2) TCA's behavioral assumptions, (3) the effects ofenvironmental uncertainty, (4) TCA's unit of analysis, and(5) the governance decision.

The Concept of Transaction Costs

As several TCA critics bave noted, the concept of transac-tion costs was not articulated clearly in Williamson's (1975,1985) original framework (see Dow 1987; Kay 1992). Cur-rently, however, the nature of these costs is much betterunderstood. In Table 2, we summarize the source andnature of the most common forms of transaction costs. Asis shown in this table, transaction costs may arise in theform of direct or opportunity costs (Malone 1987; Masten,Meehan, and Snyder 1991). These costs are directly relatedto asset specificity, environmental uncertainty, and behav-ioral uncertainty.

As was noted previously, asset specificity creates a safe-guarding problem (Rubin 1990). Without appropriate safe-guards, firms face the risks of expropriation (ex post) or pro-

TABLE 2Sources and Types of Transaction Costs

A. Source of Transaction CostsNature of Governance

Problem

B. Type of Transaction CostsDirect Costs

Opportunity Costs

AssetSpecificity

Safeguarding

Costs of craftingsafeguards

Failure to invest inproductive assets

EnvironmentalUncertainty

Adaptation

Communication, negotiation,and coordination costs

Maladaptation;Failure to adapt

BehavioralUncertainty

Performance Evaluation

Screening and selectioncosts (ex ante)

Measurement costs(ex post)

Failure to identifyappropriate partners

(ex ante)

Productivity losses througheffort adjustments

(ex post)


ductivity losses resulting from the failure to invest in spe-cialized assets (ex ante). For example, to discourage oppor-tunism on the part of their principal, manufacturers' agentsincur direct costs in order to develop ties with their down-stream customers (Heide and John 1988). Without suchsafeguards, an agent's market development efforts could beexploited, or such investments may not be made at all.

Environmental uncertainty creates an adaptation prob-lem. The associated transaction costs include the direct costsof communicating new information, renegotiating agree-ments, or coordinating activities to reflect new circum-stances. A failure to adapt involves an opportunity cost ofmaladaptation (Maione 1987). For example, an originalequipment manufacturer (OEM) may need to incur consid-erable transaction costs in order to motivate an extemal sup-plier to modify the design of the components that constituteits end product (Walker and Weber 1984). A failure to under-take such changes, however, may place the OEM at a com-petitive disadvantage relative to other manufacturers.

Behavioral uncertainty gives rise to a perfomiance evalu-ation problem. To the extent that a party's true level of per-formance is not readily apparent, direct measurement costsmay need to be incurred. These may be in the form of mea-suring outputs or behaviors (Eisenhardt 1985). In the originalTCA framework, because of the need to prevent opportunis-tic exploitation, evaluation problems give rise to measure-ment costs. Ouchi (1979) provides a different account of thisprocess. According to Ouchi, measurement costs are incurredin order to distribute rewards across parties in an equitablefashion. If rewards are not allocated equitably, a party mayeventually reduce its individual efforts. Thus, a performancemeasurement failure may lead to opportunity costs in theform of productivity losses. Forexample, a failure on the partof a manufacturer to monitor and control free riding acrosssales territories could cause distributors to reduce their salesefforts for the manufacturer's brands, which ultimately couldplace the firm at a competitive disadvantage.

Behavioral uncertainty causes difficulty because of expost infonnation asymmetry regarding task performance.Information asymmetry also may exist ex ante, because ofan inability to ascertain a party's true characteristics prior toexchange. Typically referred to as adverse selection(Akerlof 1970), this problem is more commonly associatedwith agency theory than with TCA per se. For our purposes,however, we note that this form of information asymmetrygives rise to direct transaction costs in the form of selectionand screening efforts designed to identify appropriateexchange partners a priori (Bergen, Dutta, and Walker1992). The relevant opportunity costs are associated withlosses resulting from establishing relationships with partiesthat lack needed skills or motivation.

The preceding discussion highlights some importantaspects of transaction costs. First, such costs may beincurred both ex ante, in connection with selection or infor-mation gathering, and ex post, in connection with measure-ment and enforcement. Second, the relevant opportunitycosts, though not as well understood as the direct costs, maybe important determinants of firm performance. The poten-tial inability to use specialized assets and adapt to changingcircumstances or more generally to the foregone profits

from "valuable deals that won't be done" (Calfee and Rubin1993, p. 164) suggests that a firm's govemance decision notonly influences costs in a narrow sense, but also is an impor-tant determinant of value. This point has not always beenrecognized in previous research (Zajac and Olsen 1993).

One frequently expressed concem is that despite TCA'sexplicit normative orientation, there is limited empirical evi-dence of the performance effects of following TCA's guide-lines. Most of the studies in our review are limited to docu-menting whether firms follow TCA prescriptions rather thanto examining how firm decisions affect performance. Tran-sition cost analysis researchers have justified this descrip-tive-oriented approach by intentionally studying competitiveindustries, in which the survivors are assumed to follow nor-mative decision rules (Shelanski and Klein 1995).^

The limited research on TCA's performance implica-tions makes it difficult to assess fully its theoretical valueand empirical validity. As can be seen in our review, a smallbut growing number of researchers (e.g., Heide and John1988; Noordewier, John, and Nevin 1990; Pilling, Crosby,and Jackson 1994; Sriram, Krapfel, and Spekman 1992;Walker and Poppo 1991) have attempted to measure trans-action costs or performance dimensions. We encouragefuture researchers to further these efforts by developing reli-able and valid measures of transaction costs and examiningthe performance implications of aligning govemance prob-lems and structures.

Two related areas of further research also deserve sub-stantial attention. First, though TCA recognizes that gover-nance decisions involve a trade-off between transaction andproduction costs, few studies have examined the role of pro-duction costs. In addition, there is a considerable degree ofdivergence among the studies that do include productioncosts, as some researchers find that production costs have agreater impact on govemance structures than transactioncosts (e.g., Klein, Frazier, and Roth 1990; Walker and Weber1984, 1987), whereas others find just the opposite (e.g.,Anderson 1985; John and Weitz 1988). Clearly, furtherresearch is needed to clarify the role of production costs vis-a-vis transaction costs in determining appropriate gover-nance structures.

In addition to the role of production costs, furtherresearch is needed to assess the impact of the costs associ-ated with intemal organization. Examples of intemal orga-nization costs include the costs of monitoring employees,administrative overhead, and bureaucratic inefficiency dueto political posturing (Anderson 1985; Masten, Meehan, andSnyder 1991). Williamson (1985) acknowledges that inter-nal organization possesses inherent problems, such as "low-powered" incentives relative to markets. Other scholars haveargued that transaction costs exist within firms, as well as inmarkets (e.g., Demsetz 1991; Dow 1987; Eccles 1985).Unfortunately, empirical evidence regarding the impact of

^According to Shelanski and Klein (1995, p. 338), TCA andmany of its extant empirical tests are ba.sed on the implicit a.ssump-tion that "market forces bring about an efficient sort between trans-actions and governance structures, so that exchange relationshipsobserved In practice can be explained in terms of transaction costeconomizing."


the costs of intemal organization is scarce. In one of the fewempirical studies on intemal organization costs, Masten,Meehan, and Snyder (1991) find that these costs account forapproximately 14% of the total costs of component procure-ment for a large naval project. More important, Masten,Meehan, and Snyder's findings suggest that asset specificityleads to intemal organization, not by increasing the costs ofmarket exchange (as TCA suggests) but by decreasing thecosts of intemal organization.

Transaction Cost Analysis's Behaviorai Assumptions

As was noted previously, TCA is built on two key behavioralassumptions: bounded rationality and opportunism. Each ofthese assumptions has received considerable scrutiny inrecent years.

Bounded rationality. In general, bounded rationalityappears to be the least controversial of TCA's two assump-tions. However, two specific critiques deserve mention.First, bounded rationality has sometimes been interpreted asan indication of stupidity on the part of economic actors.This is an inconect interpretation. Bounded rationality sim-ply means that certain physical limits exist on the humanability to process information. Decision makers are inten-tionally rational, but only limitedly so (Simon 1961). Thelimitations of human decision making have been well docu-mented in the literature and include such shortcomings asoverconfidence, competitive blind spots, and improper valu-ation of gains and losses (e.g., Kahneman and Tversky 1979;Mahajan 1992; Zajac and Bazerman 1991).

A more interesting issue is the apparent inconsistencybetween TCA's original use of the bounded rationality con-cept and more recent references to farsightedness(Williamson 1991a). At first glance, farsightedness, or theability to anticipate future exchange conditions, appearscounter to bounded rationality's focus on cognitive limita-tions. It should be noted, however, that TCA's use of theterm farsightedness pertains to the ability to anticipate con-ditions of dependence that are created by specific invest-ments (Williamson 1993, p. 461). It does not include theability to "specify complete decision trees" ex ante(Williamson 1975, p. 23). Thus, bounded rationality and theresulting inability to write comprehensive contracts remainan important part of TCA.

Opportunism. Compared to bounded rationality, TCA'sassumption of opportunism is considerably more controver-sial (Donaldson 1990; Ghoshal and Moran 1996). Much ofthe controversy has focused on whether TCA's notion ofopponunism is descriptively accurate, or whether termssuch as trust more closely describe how exchange partnersbehave. In our opinion, this particular critique of TCA issomewhat misplaced.^ As was noted previously, TCA does

It should be noted that TCA is not alone in recognizing oppor-tunistic behavior. For example, opportunism appears prominentlyin both theories of bureaucracy (e.g., Crozier 1964) and interper-sonal relations (e.g.. Goffman 1969). Accounts of opportunism andexploitation can also be found in various versions of power-depen-dence theory (e.g., Hickson et al. 1971; Pfeffer and Salancik 1978).

not assume that all social actors are opportunisticallyinclined, only that some actors behave opportunistically, andit is difficult and costly to identify opportunistic actors exante (Bamey 1990). Furthermore, the current TCA literatureexplicitly acknowledges that opportunism is an endogenousvariable, rather than an invariable and fixed condition(Anderson 1988; John 1984).

On the basis of recent research, we believe that there areother questions surrounding opportunism that warrantgreater attention. These questions pertain to (1) the properlabeling of relationship behaviors, (2) the antecedents ofthese behaviors, and (3) the implications of deviations fromopportunism. In regard to the first. Chiles and McMackin(1996) draw a distinction between real trust and trust-likebehaviors. In his recent work, Williamson (1993, 1994a, b)expresses a similar view and wams against combining seem-ingly similar behaviors into a common category and label-ing it "trust." Real trust originates from the social context ofa particular relationship through social norms, sucb as reci-procity (Gouldner 1960), or through personal relationships(Granovetter 1985; Macaulay 1963). In contrast, trust-likebehaviors can be explained by economic calculus or thepresence of incentive structures that promote relationship-oriented behaviors or restrain opportunism. For example,Axelrod's (1984) research on the prisoner's dilemma sug-gests that cooperation can be promoted among self-inter-ested parties if the stmcture of the game permits rewardingor punishing prior moves. In this scenario, cooperation isdetermined purely by self-interest or "calculativeness."Thus, though shared purposes and common goals (Zajac andOlsen 1993) are important in business relationships, the realissue is how they arise. In the absence of preexisting norms,this may require developing incentives that produce a "sim-ilarity of selfish interest" (Macneil 1981, p. 1034).

Ultimately, the most important question surrounds theimplications of deviations from opportunism. Recall thatthe basic premise of TCA is that the risk of opportunismcreates a need for formalized govemanee structures. Sev-eral researchers have argued on conceptual grounds thattmst, due to either social norms or personal relations, mayserve as a substitute for formal mechanisms such as con-tracts and direct controls (e.g., Griesinger 1990; Hill 1990;Macaulay 1963). The empirical evidence on this issue isboth limited and mixed. In support of the substitutionhypothesis, Gulati (1995) finds that previous alliancesbetween a set of parties reduce the need for explicit (i.e.,equity-based) govemanee in subsequent alliances. Like-wise, Stump and Heide (1996) show that early supplierqualification efforts tend to reduce buyers' subsequentmonitoring efforts. A different pattern of results emergesfrom Heide and John's (1992) study of buyer-supplier rela-tionships. They find that the presence of relationship-spe-cific norms enhances a buyer's ability to acquire controlover a supplier. By themselves, however, norms have noeffect on buyer control. Thus, norms serve as moderators ofcontrol, rather than bave a direct impact on it. An importantavenue for further research is to determine the specific con-sequences of competing behavioral assumptions.


The Effects of Environmentai Uncertainty

The impact of environmental uncertainty on govemancedecisions is ambiguous. According to the original TCAframework, the effect of extemal uncertainty is an inabilityto write an a priori comprehensive contract (Williamson1985). In tum, an adaptation problem is created, whichinvolves potential transaction costs in connection with mod-ifying relationships to changing circumstances. The originalprediction, however, is that adaptation is only problematic inthe presence of specific assets (Williamson 1975). If specificassets make an exchange partner difficult to replace, becauseof a high level of switching costs, requests for adaptationmay be opportunistically exploited. For example, a partnermay demand concessions or engage in costly haggling andcreate holdup costs. In the absence of specific assets, how-ever, the adaptation problem can be managed simply byreplacing an incumbent exchange partner with a new one.Thus, in a statistical sense, TCA's original frameworkhypothesizes an interaction effect between environmentaluncertainty and asset specificity.

Few studies report evidence of the interaction betweenenvironmental uncertainty and asset specificity (e.g., Ander-son 1985; Walker and Weber 1987). In contrast, there isabundant evidence of main effects of uncertainty. Severaldifferent explanations exist for the apparent discrepancybetween TCA's conceptual framework and the empiricalevidence. Shelanski and Klein (1995) speculate thatresearchers have simply failed to test for interactions. How-ever, at least three studies in our review test this interactionbut fmd no significant effects (i.e., Anderson and Schmit-tlein 1984; Gatignon and Anderson 1988; Klein, Frazier, andRoth 1990). A more plausible explanation, suggested byboth Noordewier, John, and Nevin (1990) and Klein, Fra-zier, and Roth (1990), is that what appears in the extant stud-ies as main effects may actually be interactions. For exam-ple, Noordewier, John, and Nevin do not explicitly measureasset specificity in their study, but assume that asset speci-ficity exists at a nonzero level. Thus, their test of uncertainty,though not a formal test of an interaction with asset speci-ficity, may be consistent with TCA's notion of the jointeffects of these variables. Another possibility is that becauseinteractions and main effects often are highly correlated, theinclusion of both types of effects leads to an increase in stan-dard errors, which makes both effects nonsignificant. Forexample, Klein, Frazier, and Roth (1990) examine theeffects of asset specificity and environmental uncertainty,but find no significant effects for either the interaction termor the main effects of uncertainty due to collinearity.

Although we believe that the latter line of reasoning isplausible, it is also possible that the reported main effectsof environmental uncertainty have a conceptual explana-tion. These main effects suggest that the problem createdby environmental uncertainty is handled more efficiently bycreating a governance structure that permits adaptationwithin an ongoing relationship, rather than by switching toa new partner if changes need to be made. In other words,intemal organization and other forms of planned gover-nance (Williamson 1991b) are inherently superior to mar-ket or spontaneous govemance with respect to processing

and responding to new information. In the case of completeintegration, this is due to the presence of an authority struc-ture that can bring about adaptation through fiat(Williamson 1985) or command (Lindblom 1977). How-ever, even in nonintegrated situations, close relationships(Heide and John 1990) may enjoy commonalties in knowl-edge and modes of communication (Conner and Prahalad1996) that permit more efficient adaptation than does mar-ket govemance. Therefore, the observed main effects ofuncertainty are perhaps not surprising. This line of reason-ing is consistent with Rangan, Corey, and Cespedes's(1993, p. 473) assertion that environmental uncertaintyshould be considered an antecedent of asset specificity, andthat "uncertainty and asset specificity are sequential ratherthan independent constructs."

A final comment on uncertainty concems the relativemerit of tight versus loose coupling. Research on organiza-tion design has suggested that there are limits to the amountof uncertainty that can be managed through formal organi-zational arrangements (Scott 1987). Extreme levels ofuncertainty could lead to infonnation processing problemsof such a magnitude that the loose coupling afforded bymarket govemance becomes preferable (Shelanski andKlein 1995). It appears that some types of uncertainty (i.e.,threat of technological obsolescence and instability of for-eign markets) may be handled better through market gover-nance than through intemal organization because of the flex-ibility associated with market-based exchanges (Balakrish-nan and Wemerfelt 1986; Heide and John 1990; Klein1989). In summary, though certain aspects of uncertainty arewell documented in the empirical research, several unan-swered questions remain that deserve further investigation.

Transaction Cost Anaiysis's Unit of Anaiysis

Consistent with the early work of Commons (1934), TCA'smodal unit of analysis is the individual transaction. As aresult, the tendency in previous empirical work has been tofocus on how individual relationships or exchanges are orga-nized at a given point in time (Nooteboom 1992). Thisimplicit tendency to focus on single transactions and rela-tionships ignores the temporal nature of interorganizationalrelationships. As Sahlins (1972, p. 185) observes, "A mater-ial transaction is usually a momentary episode in a continu-ous social relation." Expanding the unit of analysis beyondsingle transactions has important implications. First, pastinteractions or exchange episodes (Hakansson and Snehota1985) may influence how a new transaction is organized.For example, Gulati (1995) shows how the govemance fea-tures of earlier joint ventures between firms (i.e., the finan-cial arrangements used) influence the govemance of subse-quent ventures. Gulati's general conclusion is that priorleaming or experience with a particular exchange partnermay reduce the need for more formal govemance mecha-nisms in subsequent transactions.

In addition to the impact of past relationships, anticipa-tion about future exchanges may influence how a presentexchange is organized. Drawing on Axelrod's (1984) workon repeated games, Heide and Miner (1992) show that the"shadow of the future," represented by a relationship's


expected time horizon, promotes cooperation in the pre-sent. Likewise, Parkhe (1993) fmds that partners that com-mit specific investments (i.e., pledges) to a strategicalliance lengthen the shadow of the future, which leads toincreased alliance performance by reducing the need forcostly contractual safeguards. In game theory terminology,expectations of future exchanges serve as enforcementdevices because of the ability to reward or punish prior"moves." As Parkhe (1993) notes, important conceptuallinkages between TCA and game theory could provideinsights into both perspectives.

The previous examples show that the time dimensionwithin a given relationship has implications for how an indi-vidual transaction is governed because of either the past his-tory of interorganizational relations or the incentive structurecreated by the expectation of future transactions. In addition,the govemance of a particular transaction may be influencedby other actors within an interorganizational network, eitherdirectly or indirectly (Anderson, Hakansson, and Johanson1994; Hakansson and Snehota 1995). However, the specificprocesses that may occur within an interorganizational net-work have not always been clearly described. DiMaggio andPowell's (1983) theory of institutional isomorphism providessome insight into this issue. The main premise of this theoryis that organizational decision making may be influenced asmuch by imitation as it is by efficiency. Unlike TCA, whichattempts to explain govemance choice on the basis of certaindimensions of a relationship, institutional isomorphism the-ory claims that the stmcture of a given relationship is a ques-tion not only of efficient adaptation at the dyadic level, butalso of imitation throughout a network. For example, recentwork on population-level leaming by Miner and Haunschild(1995, p. 155) suggests that in contrast to TCA's emphasis onfixed transaction dimensions in determining particular orga-nizational forms, "the population leaming perspective wouldemphasize instead ways in which firms may have copiedsuch practices from each other, often believing them to betechnically useful." Expanding the unit of analysis is helpfulin identifying a broader range of govemance options thanwhat was considered in the original TCA framework. Wehope that further research will document these govemanceoptions in greater detail.

The Governance Decision

Our review of empirical TCA research highlights some ofthe altemative govemance mechanisms used in managinginterorganizational relationships. Some researchers havelabeled these altemative govemance mechanisms "hybrids"and suggest that they can be viewed conceptually as mid-points on a continuum ranging from market exchange tohierarchical integration (e.g., Williamson 1991b).

Several other researchers have argued that this hybridperspective is too simplistic and that the market-hierarchycontinuum obscures the different ways in which relation-ships can be organized (e.g., Bradach and Eccles 1989).Echoing these thoughts, both Heide (1994) and Robicheauxand Coleman (1994) suggest that there is a broad range ofnonmarket relationships that differ in important and sys-tematic ways. For example, some of the studies in our

review claim that govemance problems can be managed byearly selection and/or socialization efforts (e.g., Heide andJohn 1990). Other studies focus on the role of incentives(e.g., Anderson and Weitz 1992) and the development ofrelational norms (e.g., Heide and John 1992) in governingrelationships.

Although many different governance classificationschemes can be developed, the diversity of govemancemechanisms identified in previous research raises importanttheoretical and practical questions. First, the relative effec-tiveness of different govemance mechanisms in addressingparticular govemance problems has not been explored fully.For example, is partner selection preferable to incentivedesign for the purpose of minimizing the risk of subsequentholdup? Would a manufacturer be better off investing in acomprehensive supplier selection process (Stump and Heide1996), rather than relying on contractual penalties (Mastenand Crocker 1985)?

Second, previous research has identified a range of dis-tinct govemance problems but has not fully answered howthe available govemance mechanisms align with these prob-lems. For example, though partner selection is most com-monly associated with information asymmetry problems(e.g., Ouchi 1979), it also may minimize the risk of holdup(Stump and Heide 1996) as well as facilitate adaptation touncertainty. Thus, any individual govemance mechanismmay serve multiple purposes.

Third, on a related note, the specific effects of differentgovemance mechanisms have not been well documented byprevious research. As an example, hard contractual provi-sions (Joskow 1987) and explicit control (Celly and Frazier1996) may serve as effective checks on opportunism. It isunclear, however, what other effects such mechanisms have.Conceivably, such strategies may produce compliance with-out inducing true cooperation (Bonoma 1976). Thus, thougha large body of empirical evidence has been generated onthe use of various govemance mechanisms, a discriminatingtheory of govemance choice is still at an early stage ofdevelopment.

Fourth and finally, TCA's aforementioned emphasis onindividual transactions as the unit of analysis ignores howdifferent govemance forms can be combined. Transactioncost analysis implicitly frames a firm's govemance decisionas a choice between competing altematives—in its simplestform a discrete choice between market, hierarchy, or someintermediate or hybrid form (Williamson 1991b). In all ofthis literature, however, the focus is on a single govemanceform. Bradach and Eccles (1989) challenge this view andpersuasively argue that firms may purposely combine differ-ent govemance forms by using a "plural forms" approach.Although Bradach and Eccles (1989) limit themselves topresenting the general argument, subsequent research hasbegun to identify the specific antecedents of such a strategy.Bergen and colleagues (1995) provide the first TCA study ofplural forms; they use an industrial distribution context, inwhich manufacturers often face the options of either servinga particular sales territory entirely with independent agents(i.e., market govemance) or relying on a combination ofagents and direct sales to house accounts (i.e., market andhierarchical govemance). They suggest that a plural forms


approach permits manufacturers to achieve the benefits typ-ically associated with market governance (e.g., scaleeconomies, high-powered incentives) while minimizing itsinherent shortcomings (e.g., risk of opportunistic exploita-tion). Specifically, augmenting an agent system with a directsales force permits a manufacturer to manage the safeguard-ing and performance evaluation problems that might beassociated with a (unitary) agent system. As such, a pluralforms approach may offer govemance synergies of variouskinds. This is an especially important area for future appli-cations of TCA.

ConclusionLike all useful theories, TCA has steadily evolved over timein response to new theoretical and empirical developments.For example, though a workable theory of transaction costshad been formulated by the early 1970s, its transactiondimensions were not formally specified until around 1980

(Joskow 1988). Although the marketing discipline hasrecently seen an explosion of TCA research efforts, andtransaction costs are quickly becoming an establishedresearch paradigm, the basic theory is still in need of furtherdevelopment (Rangan, Corey, and Cespedes 1993). AsWilliamson (1992, p. 349) states, "Transaction cost eco-nomics needs to be refined and extended. It needs to be qual-ified and focused. It needs to be tested empirically."

The first step in refining any theory is to conduct a thor-ough assessment of its current status and a synthesis of itskey findings. By providing a comprehensive and integrativereview of 45 key empirical examinations of the TCA frame-work, along with an agenda for future research efforts, welay the conceptual groundwork for the further refinementand extension of TCA investigations both within marketingand in related disciplines. We hope this effort provides TCAresearchers with a useful review of previous TCA research,a synthesis of our current knowledge, and a set of freshinsights for further investigations of this intriguing theory.

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WASHINGTON • UNIVERSITY- IN • ST- LOUIS

John M. Olin School of Business

The John M. Olin School of Business is seeking faculty at all levels who have research and teachinginterests in marketing. The qualifications include a demonstrated interest in and capacity to do researchpublishable in leading marketing joumals and a high level of teaching competence in graduate andundergraduate classes. Candidates should hold a doctorate degree or be near completion. The OlinSchool has 65 full time faculty and offers degree programs at the Bachelors, Masters, and Ph.D. level.The School has excellent physical, computing and library facilities. Faculty receive superior support forboth research and teaching activities. Applications should include a curriculum vita, names and addressesof at least three references, and copies of research papers and publications.

Contact: Dean Stuart I. Greenbaum, John M. Olin School of Business, Washington University, Box 1133,One Brookings Drive, St. Louis, MO 63130. For fullest consideration, applications should be received byNovember 1, 1997.

Washington University is an equal opportunity/affirmative action employer and welcomesapplications from women and minorities.


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Aric Rindfleisch & Jan B. Heide Transaction Cost Analysis ... 08, 2016 · entry strategy (e.g., Anderson and ... opportunity costs of making inferior govemance decisions. ... exploit