But what are these pesky transactions costs that determine the boundary of the firm?The answer given is that
There we have no consensus. One leading theory invokes costs of haggling ex post if two firms are not integrated (Wiliamson got the Nobel Prize for this theory). The other says there are no costs of haggling ex post and bargaining in efficient but there is a hold up problem in bargaining as surplus is split. Knowing this firms underinvest ex ante. The allocation of property rights affects the ex post division of surplus and hence this leads to a theory of optimal property rights (this theory has been developed by Oliver Hart with his co-authors Sandy Grossman and John Moore (GHM)).Is the obvious third possibility not missing? A combination of Williamson and Grossman-Hart-Moore or the reference point approach due to Hart and Moore. As I have argued in Walker (2013: 690-1),
The reference point approach can be seen as a movement away from the ex ante GHM approach and back towards transaction cost thinking in so much as contracting is not perfectly contractible ex post. This fact, as Hart (2008, p. 294) points out ‘[...] is a significant departure from the standard contracting literature. The literature usually assumes that trade is perfectly enforceable ex post (for example by a court of law). Here we are assuming that only perfunctory performance can be enforced: consummate performance is always discretionary’, and thus inefficiencies can arise ex post. The development of a tractable model of contracts and organisational form that exhibits ex post inefficiency is one of motivations for advancing the reference point approach in the first place. (Hart and Moore, 2008, p. 4). Hart’s interpretation of the reference point theory is ‘[i]n a sense, this work can be viewed as a “merger” of the transaction cost and property rights literatures’. (Hart, 2011b, p. 106).While it is true that there may be no overall consensus on which transaction costs matter for the boundaries of the firm, it is also true that the transaction costs and property rights approaches are not as diametrically opposed as the second quote above would suggest since a midway between them can also be found. Oliver Williamson has argued in the past that the ideas in Coase's paper "The Nature of the Firm" had for many years been under-used because the idea of transaction costs had not been "operationalised". What the above would suggest is that transaction costs have yet to be fully incorporated into a general theory but progress has been, and is still being, made.
- Hart, Oliver D. (2008). Economica Coase Lecture: reference points and the theory of the firm. Economica 75(299) August : 404–411.
- Hart, Oliver D. (2011b) Thinking about the firm: a review of Daniel Spulbers the theory of the firm. Journal of Economic Literature 49(1) March: 101–113.
- Hart, Oliver D. and Moore, John (2008). Contracts as reference points. Quarterly Journal of Economics 123(1) February: 1–48.
- Walker, Paul (2013). The 'Reference Point' Approach to the Theory of the Firm: An Introduction. Journal of Economic Surveys, 27(4) September: 670-95.