Transaction theory tends to focus on the choice of an individual organization. A central hypothesis of transaction theory is that inter-unit theory relationships in which supplier assets are specialized to have lower transaction costs inside an organization than when the relationship is between organizations. The theory which was proposed by Williamson (1975, 1985), is based on the central assumption that exchange takes the form of a series of transactions.
Transaction cost theory forms a common foundation to explain the capacity of different mechanisms such as markets, laws, organizations, norms and information technology, to organize human and organizational behaviour (Allen, Morton, 1994, pp.
298). The theory is based on two central behavioural assumptions: Individuals operate with bounded rationality, which means that the capacity for the human beings to make complex decisions is inherently constrained. Individuals sometimes act opportunistically, which means that they can act guilefully so as to exploit a situation to their own advantage.
(Fyall, Garrod, 2005, pp. 149) According to the theory, the transaction costs associated with a particular activity will depend on three dimensions: Asset specificity, which refers to the degree to which the transaction needs to be supported by transaction-specific assets and which is considered to be most important.
Uncertainty which will make it less likely that a given transaction will be assigned to the market. Frequency which refers to how often the relevant transactions will be made. (Fyall, Garrod, 2005, pp. 149)
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