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Uncertainty, Judgment, and the Theory of the Firm

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Author

Summary, in English

The effects of a truly uncertain future are more far-reaching than what has traditionally been assumed in transaction cost economics. Uncertain governance choices require that agents exercise judgment in the absence of other means of estimating the payoffs associated with complex combinations of transaction attributes, contractual contingencies, and governance structures. Judgments are made on an experimental basis to incrementally improve actors’ heterogeneous cognitive representations of the contractual landscape. I argue that uncertain governance choices are subject to specific decision-biases that interact with the potentially corrective function of current organization and asymmetries in actors’ access to decision-supporting systems. These asymmetries may affect the contracting parties’ preferences over differential governance structures. Specifically, by overestimating individual unbiased rationality and disregarding how access to decision-supporting systems may affect governance choice, transaction cost economics runs the risk of underestimating the degree of vertical integration in actual firms.

Publishing year

2015

Language

English

Pages

623-650

Publication/Series

Journal of Institutional Economics

Volume

11

Issue

3

Document type

Journal article

Publisher

Cambridge University Press

Topic

  • Economics and Business

Keywords

  • decision-biases
  • entrepreneurial judgment
  • transaction cost economics

Status

Published

ISBN/ISSN/Other

  • ISSN: 1744-1382