Hi Katarzyna,

As Juehui correctly pointed out, Williamson's determinants of TC refer to the "unit of transaction", as a continuity of the unit of production. In value chains, there is a continuum of production and transaction units. This works fine for the economic organization or governance of an industry or a sector.

In my opinion, although Williamson's conceptual framework helps, I would prefer to use North's or Coase's. The first to identify the "concept"(not the definition) of transactions costs, was Ronald Coase in his seminal Paper, "The Nature of the Firm", 1937. Although he was looking for an explanation for the creation of the firm, he started the interest for the study of this field of knowledge. Previously, Commons, 1934, stated that the 'Transaction" was the ultimate unit of economic research.

Coase considered transaction costs, the costs of using the market system or price mechanism. Later, 1960 he slightly changed and included al the process of price survey, contract writing, contract completion and eventually their enforcement. Again, he's giving a TC definition from an economic or commercial view.

Douglass North, defined TC as the "cost of human or social interaction" and this I believe is the definition that best suits your requirements. He focus on a "macro institutional theory". Fukuyama also refers to TC when referring to "Social Capital" and "Trust".

Two books by North allow you to understand this concept and its links to economic performance and institutional change:

1- "Institutions, Institutional change and economic performance", 1990

2- "Understanding the process of economic change", 2005

When you say "institutions", are you referring to North's concept as that of "the rules of the game", informal or formal? Or you are talking of "organizations"?

What North says is that "institutions" carry embedded the system of economic incentives that determine the "institutional environment" and the amount of transactions costs. As TC increase, you get a lower amount of transactions, and hence a lower economic performance. High TC are barriers for the creation of new organizations, being them political, educational or firms.

He stated that you can study and forecast the performance of a certain economy by the institutional path or what he called "path dependence". So strong are the links between the system of economic incentives and the performance of an economy, that he states that if piracy is a profitable activity in a society, what you are going to get are good pirates.

The enforcement of institutions (rules of the game) are also a TC, what he calls an "ex post TC", because if  there is any kind of breach of a contract, the cost of litigation and enforcing the contract or the law, is included as a TC. This is why "Trust" reduces TC, and trust exists when there is "social capital" and viceversa.

I really do not know which is the core subect of your research, but I would say that "information" would impact TC and the more information you have about neighbours, or institutions (rules of the game), TC will tend to be lower. The same happens with "enforcement", which not necessarily needs to be performed by the government. There is private ordering, just as the first "merchant judges" in the middle ages. Mediation and arbitration are also ways of non legal governance or non legal centralism.

Cooperation is based on the principle of "reciprocity", so in one way or another you must create the conditions as to have this principle respected. Having "fixed numbers of participants", and avoiding fluctuation of members helps to develop trust, by increasing the number of interactions among members and increasing information about them.

Defining the "rules of the game" and creating the "enforcement mechanisms", also help to reduce TC, because you lower the level of risk or uncertainty for each interaction. Finally, sharing similar values or cultural traits, increase "social capital", favors trust and reduces TC. Collaboration is always eased when you have certain social identity or affinity.

I really don't know which is the situation in Poland, but would imagine that there is quite a similar origin for citizens or neighbours, quite different to what happens in countries where immigration plays an important role. They more or less share similar values and cultural traits, something quite different when you have immigrants from Asia, Latin America, Europe and Middle East, with different backgrounds, religions and cultures.

I do not know whether this will be useful to you. If you want I could send you some essays written by North, which are quite short an easy to understand. If not you can check any of his papers or books, which I believe will be of extreme use to you. I have written a paper in Spanish, about 12 years ago about TC, but with a focus on commercial "transactions".

If you think I could be of further help, just let me know.

Good luck with your research!

Alejandro

Hi Juehui,

As I said in my previous comment your contribution about Williamson's conceptual framework is accurate and right on the spot. Williamson's theory (transaction costs economics) is based on "contractual arrangements" or a theory of contracts. Actually he works on the attributes of transactions, devising "safeguards" to overcome "hazards". I call it "nanoeconomics". I believe this is better suited for commercial transactions, but not quite so for "social interactions" as I understand is the case Katarzyna is posting. I'm not saying it's not useful, I'm just saying that North's or Coase's approaches have a broader scope for this analysis. Fukuyama, who has long worked with trust and social capital, gives the "social environment" to better understand and explain them.

Different authors give different definitions of "transactions costs". Even more, Coase changed the original concept to his most recent: "...we must take into account the costs involved in operating the various social arrangements (whether it be working of a market or of a governmental department) as well as the costs involved in moving to a new system. In devising and choosing among social arrangements we should have regard for the total effect" (Coase, 1990: 156)

In order to understand transaction costs, I believe that one needs to understand "cost theory", which is a professional incumbency of accountants. There are technical resolutions about their registration and estimate. Once the "technicalities" of costs are understood , you can easily estimate transaction costs, as the costs "accrued" to the transaction unit. The concept of transaction unit I took it from Williamson, when he states that it is the unit between different "technological platforms".

Three Noble laureates, Coase, North and Williamson, made the most impressive contribution to "The New Institutional Economics". A synthesis of them has to be made in order to completely understand the concept and scope of Transaction Costs. North at a Macro level, Coase at a micro and Williamson at a Nano level. Transaction Cost Economics is a major achievement of Williamson, and clearly explains the economic organization of an industry or sector. The rationale behind Williamson's approach is the optimizing of resources, or the "economizing function", as he says. This makes it a clear cut economic approach, in opposition to others based on "organizational sociology" (most of them French)

What is not clear is if Katarzyna refers to "institutions" in the terms of New institutional Economics, or institutions as for the layman. I often have to clarify this concept among my students, because they understand institutions as "organizations". If she is asking about the creation of 'organizations", then I would say that the Coase approach is the most relevant for this case. Actually, he started all this debate in 1937 when he was looking for an explanation for the supersession of markets by the firm.

Above everything, New Institutional Economics and transactions costs economics are very powerful and robust conceptual frameworks to understand many of the economic and social phenomena. You can understand most of the economic failures in Latinamerica and former USSR, using the NIE conceptual framework.

Why have I devoted so much time and effort to this issue? Because transaction costs are crucial to understand the performance of "agrifood value chains". Most of TC are "hidden" costs, and as long as they remain hidden, there is no prospect to understand their behaviour and minimization.

When you make a synthesis of the Filiere approach, Value Chain approach and the NIE, you get the "institutional value chains", something I've been working on for the last 8-10 years. I have almost completed a dissertation on these issues, and need to write the last chapter.

Thank you very much for all your comments and input, and congratulations for your deep understanding of Transaction Costs, and Prof. Wlliamson's legacy!

Best regards,

Alejandro

Thanks a lot, dear Professors. I enjoyed your discussion indeed. And, dear Katarzyna, thank you for interesting question. Daniel

One of those discussions which make being on ResearchGate a real pleasure

Dear Alejandro and Richard,

thank you for your answers. All what I can write is that I am impressed... but your engagement and fascinating exchange of arguments tempt me to bother you further. I hope you will not take it as my impertinence.

What I meant in my short introduction by institution was institution defined by D.C. North. I understand it as a rules of the game and I tend to refer it to territorialised process of places creation. The places understood as complex networks of relation among people and organisation in the historical and cultural context which in time become the element of inhabitants identity.  Sometimes I also like comparing this concept with sociological concept of "stereotype" or psychological concept of "habit". But  it needs deeper clarification of course.

As to the cultural context - in the question, which refers to my planned research - I ask about the inter-organisation collaboration, among political organisations, which operate in similar surrounding. The main difference among them is rural or urban function which they have. The remaining question about the context relates to the detailed features of legal system and how these are interpreted by officials and politicians.

I am aware of R. Putnam works but I am not a great fun of social capital in his way of defining the notion. I prefer to understand the social capital in the way it was described by P. Bourdieu. It is again a subject for long discussion but I prefer to understand transaction costs more in relation to the certain "contractual arrangement" or arrangements repeated in time in certain circumstances than as a element of attitude present in chosen community as it may be understood upon the social capital concept.

Interesting question are: have you investigated the "rules of the game" and you can describe more detailed the notion of "fixed number" of participant" and "enforcement mechanism". Have you tried  to answer the questions like: how the number of participant influence the "game", what does it really means fixed, so do we now more about flexibility of the game? what are more/the most efficient (in terms of game durability) mechanisms of enforcement?

At the end - I will be grateful for every interesting paper at the subject.

Once again - thank you and best whishes.

Dear Katarzyna,

It's a pleasure if I can help in one way or another.

Lots of questions, and perhaps different professional backgrounds. I understand that you have a more sociological interest on the matter, such as which are the barriers that affect 'institutionalization. As an economist, I'm concerned about the economic performance of a system, and which are the barriers to this. It happens that transaction costs are a serious deterrent to Economic performance and hence to prosperity. It also happens that 'social capital' is a key concept to understand cooperation and economic performance.

I took note that you're not a fan of this concept, but let me tell you that it helps to conceptualize all the Neo Institutional Economics framework. Francis Fukuyama works on all these issues in a very clear and concise way. "The Great Disruption"(1999) explains very well what happened in the US during the 60s-70s. If you can understand what created the disruption, with those same elements you can work on how to develop cooperation and institutions. It has one specific chapter on Rules of the game and one on Cooperation. In my opinion this reference might help you in your research. He wrote a chapter about Social Capital in "Culture Matters. How values shape human progress" (2000) Edited by Harrison and Huntington (I have translated this chapter to Spanish if it helps)

Going back to your questions: Transaction costs are not the actual "contractual arrangements" but the cost of these arrangements. North defines the TC as the "cost of social or human interaction", meaning that there are institutional environments where costs are high and others where they are low. When you have lower transaction costs, you have more interactions and hence more prosperity, because there are more economic transactions. This is in line with Coase's statement that different social or contractual arrangements yield different economic outcomes. This means that the way you organize the society, i.e. the institutional environment, determines the economic performance.

Institutions in North's framework include the cultural values, the folklore, the codes of conduct, and these determine the transaction costs. For example in a Menonite or Amish community as you have very high levels of trust and they share similar values, TC are low, because there is almost no risk in completing a transaction, i.e. people received what they were promised. People keep their word. Is this the same in a big city or in Southern Italy?

Regarding the fixed number in a game: being a closed group (fixed number of participants), means you cannot defect, so you have to complete the transaction, because in the future you'll be ostracized or penalized by the group. In communities where you have a lot of people entering and leaving the group, you have more crime and more violations of the rules.

Enforcement mechanisms are the ones created to "enforce" the rules. The typical is the Judiciary, but there are different options, e.g. arbitration, mediation, ad hoc councils. The concept behind this is that not only you need sound Rules, but also devise the mechanism that will force people to abide by the Rules,e.g Ethical boards in professional councils or colleges as in Medical, Lawyers.

Which are more efficient? It depends on the characteristics of the transaction and on the institutional environment. In history it has proven that "self organized" enforcement mechanisms were more efficient and yielded lower transaction costs, e.g what North cites as the Merchant Laws (Ius Mercatorum) with private judges. This is called by Williamson 'private ordering' as opposite to 'legal centralism", having the State providing the enforcement.

I have done research about these issues referring to 'agrifood value chains', not regarding societies or communities. Always as a side issue, never as the objective of research. For example how to overcome lack of trust in the Beef Cattle Value Chain, when the government is the main source of risk or institutional violations. In these case my recommendation would be to keep a fixed number of members in the chain, with an admission fee, clear rules disincentivizing opportunism and defection, with private ordering. The group imposes its own rules and the enforcement mechanisms.

By being a fixed number, members are forced to repeat interactions or transactions and in this way gain information about each other and build trust. They are forced to cooperate. Cooperation requires an extended period, because it is based on the principle of reciprocity.

All North's papers and books are key to understand this issue. I'm enclosing four of North's short essays and the translation to Spanish of Fukuyama's chapter of Social Capital (you can run a translator program into Polish)

Hope this was useful and good luck with your research!

Dear Alejandro and Richard,

thank you Both for your answers. I will try to operationalize the concepts of group with fixed number of participants (with admission "fee") and self enforcement in my metropolitan research and I will let you know about the results.

Best regards

https://www.researchgate.net/publication/287162366_Transaction_Banking_Services_The_Case_of_Bangladesh

Book Transaction Banking Services: The Case of Bangladesh