Transaction Cost Theory

This video explains the transaction cost theory and the corporate governance perspective. Transaction cost theory in corporate governance explains how the costs involved in conducting economic transactions influence governance structures and decision-making. It focuses on reducing these costs to enhance efficiency and optimize organizational performance. The theory examines information asymmetry, opportunism, and rationality to design effective governance systems that align interests, mitigate risks, and promote better decision-making.


Criticism of transaction cost theory in corporate governance includes the following points:
1. Oversimplification: Critics argue that transaction cost theory may oversimplify complex governance dynamics by solely focusing on transaction costs. It may not adequately consider other factors influencing decision-making and organizational behaviour.
2. Subjectivity: The assessment of transaction costs can be subjective and challenging to quantify precisely, making it difficult to accurately measure the theory's practical implications.

3. Limited Predictive Power: Some critics contend that transaction cost theory's predictive power is limited, as it may not consistently explain governance outcomes in various industries or contexts.

4. Neglecting Social Aspects: Transaction cost theory may not adequately address the social and cultural dimensions of corporate governance, which can significantly impact decision-making and governance practices.

5. Ignoring Non-Economic Factors: Critics argue that the theory primarily focuses on economic aspects and may overlook non-economic factors, such as corporate culture, social responsibility, and ethical considerations.

6. Lack of External Environment Consideration: Transaction cost theory may not fully consider the influence of external factors, such as regulatory changes or technological advancements, on corporate governance structures and decisions.

7. Overemphasis on Efficiency: Some critics assert that transaction cost theory's strong emphasis on efficiency may lead to neglecting long-term strategic goals and stakeholder interests beyond cost reduction.

Despite these criticisms, transaction cost theory remains a valuable framework for understanding transaction-related challenges and governance structures. However, it should be complemented with other theories and perspectives to comprehensively understand corporate governance complexities.