MARKETS, FALSE HIERARCHIES AND THE EVOLUTION OF THE MODERN CORPORATION

This paper analyses the transaction cost approached as outlined and developed by O.E. Williamson. It is argued here that Williamson's version of transaction cost economics involves severe problems-both in theoretical development and empirical application. The absence of a theory of decision-making, and interpretation of hierarchy as internal market are particularly problematic. These lead to failures of analysis and it is argued that his explanations for the evolution of the conglomerate and M-Form are logically flawed, while his interpretation of the multinational enterprise neglects the empirical evidence indicating the critical importance of nonspecificity of assets in this area. It is argued that this version of transaction cost economics is likely to be of potential relevance to a much more limited domain than that claimed for it by Williamson.