In: Economics
One of the behavioural assumptions underpinning Williamson's theory of transaction costs is the concept of bounded rationality. Explain the role of this concept in the theory and the way it relates to other behavioural assumptions.
In 1937, Williamson explained that every transaction made by the firm had a cost; both internal and external costs. Attributes of transactions that are economically important and economic efficiency by reducing the costs of exchange thereby optimize the organization structure. He believes that one cannot evade the behaviour on making economical models around contracts and transactions. Williamson's theory of transaction costs based on certain Behaviour assumptions:-
Herbert Simon propounded this concept; It is based on the psychological factors of individuals mainly deals with the thinking ability and he says that there is a limit for the thinking capacity on the basis of the information, time, rational behaviour etc. In this situation of limited information decision making and problem-solving to stipulate by monitoring and adapting the transactions extra.
William defines bounded rationality as Foresight on the basis of feasibility. Identification of future outcomes and handling the outcomes based on the rationality but only limited nature so the condition is limited to receive, store, and process information. Role of bounded rationality is an impact on transaction costs and it curbs the complexity of the exchange.
Opportunism deals with self-interest and trickery. Opportunistic behaviour lies with asset specification; more asset more opportunism. deception is the main tactic in a transaction followed by opportunistic and its a burdensome in the economic transactions. Bounded rationality and opportunism are behavioural uncertainty principles it causes problems in negotiations and management of economic transactions.
The possibility of risk is an important factor in transaction costs. Risky nature is evolved from the bounded rationality that means limited information stands as a hurdle for the organization structure it is a high-risk element consist in a contract. Risk aversion through risk neutrality; Although organization structure differs in their capabilities to avert the disturbances effectively.
According to the transaction theory during the transaction, a firm gains more assets then they are in better position to win additional transactions.