Question

In: Economics

One of the behavioural assumptions underpinning Williamson's theory of transaction costs is the concept of bounded...

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.

Solutions

Expert Solution

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:-

  • Bounded rationality

             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

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.

  • Risk preference

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.


Related Solutions

One of the assumptions underpinning economics is that rational, self-interested people respond to positive and negative...
One of the assumptions underpinning economics is that rational, self-interested people respond to positive and negative incentives to make decisions. Take your everyday lives. You have a negative incentive to speed in your car — costly ticket and higher cost insurance — but a positive incentive (reward) for staying under the speed limit. Suppose Maryland implemented a “three strikes and you’re out” law for extreme forms of polluting the Chesapeake Bay. A defendant with prior convictions for two offenses would...
Question 5: Explain the behavioural theory and mention the Stages of behavioural safety.
Question 5: Explain the behavioural theory and mention the Stages of behavioural safety.
One of the assumptions of the kinetic molecular theory is that there are no intermolecular forces...
One of the assumptions of the kinetic molecular theory is that there are no intermolecular forces (attractive or repulsive) between gas particles (atoms or molecules). How would the presence of intermolecular forces affect the ideal gas equation (PV = nRT)? Again, in your response, please use terms that a high school senior who hasn’t taken AP chemistry might use.
What are transaction costs ?
What are transaction costs ?
Using (explicitly) the Calabresi-Melamed theory of transaction costs, justify the following rights by a property rule...
Using (explicitly) the Calabresi-Melamed theory of transaction costs, justify the following rights by a property rule or a liability rule: (12 pts) a) land owner's right to exclude a neighbor's gas line from his property. b) new car owner's rights to have his car's defective engine replaced by the seller c) homeowner's right to be free from air pollution by a nearby factory d) spouse's right to half the house upon divorce
(a)What are transaction costs and how does the use of the internet lower transaction costs for...
(a)What are transaction costs and how does the use of the internet lower transaction costs for e-businesses? [10 Marks] (b) Explain how the internet pushes the competitive environment further towards the perfectly competitive model.
Why do the higher-earning majors make more? What is the economic theory underpinning the vast differences...
Why do the higher-earning majors make more? What is the economic theory underpinning the vast differences in income? How did you decide what you would major in? What kind of information would be helpful when you make your decision to major in a specific subject? how does knowing what majors typically earn after college affect your view of how much you pay to go to college?
Explain the theory of comparative advantage. How realistic are the assumptions of this theory? What are...
Explain the theory of comparative advantage. How realistic are the assumptions of this theory? What are the implications for international trade of your results?
One of the basic elements of Roger's diffusion theory is the concept of adoption process which...
One of the basic elements of Roger's diffusion theory is the concept of adoption process which deals with the mental stages through which an individual passes from the time of his or her first knowledge of an innovation to the time of product adoption or purchase. Briefly describe these stages giving examples of Apples' iPhone.
One of the demand theory is profound knowledge is knowledge about variation .discuss the concept and...
One of the demand theory is profound knowledge is knowledge about variation .discuss the concept and explain how it can be applied to real word businesd .provide an example to support your argumemt
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT