Transaction Costs, Production Costs, and the Passage of Time

Abstract

A little more than 20 years ago, Ronald Coase (1972, p. 63) observed tartly that his 1937 essay ``The Nature of the Firm'' had been ``much cited and little used.'' The landscape of economic thought changed significantly in the years that followed, and a large body of literature quickly emerged that not only ``used'' but in many ways sprang from Coase's paper. The basic insight is now well known. In addition to production costs of the usual sort, one must also consider ``transaction costs'' --- as they later came to be called --- in explaining institutions like the firm. Whether called transaction-cost economics (Williamson, 1975; 1985) or the economics of organization more broadly (Milgrom and Roberts, 1992), the Coasean literature of the last 20 years has indeed focused precisely on the comparative transaction costs of alternative organizational structures, including, paradigmatically, the choice between firms and markets.