Hey guys. I am really confused about Transaction Cost Theory. I've read the BPP Study Text but I still do not understand it. Can anyone explain this theory?
Basically how I understood it is transaction cost theory is the relationship of transactions with others (be it internal or external to the org ) and whether the cost can justify the occurrence of the transaction. Similar to agency theory, it's just making sure that opportunism is minimized and transactions are taking place to the benefit of the org as a whole. For example, is it worth the org outsourcing Labour when they can train in-house and reduce costs. The more internalized transactions are the less the risk exposure and uncertainty about quality and cost of external hiring. An opportunistic approach would be hiring external Labour as it is readily available, however that may lead to leaking trade secrets or mistrust and uncontrollable fixed Labour costs. question is, was it worth it?
Feel free to disagree with me.