Risk Propensity, Trust, and Transaction Costs In Relational Contracting

Abstract

Critics of transaction cost economics (TCE) argue that TCE is not able toexplain variations in governance arrangements between the extremes of marketand hierarchy. They further dispute the assumptions of opportunism andrisk neutrality underlying the theory. While TCE proponents have developedapproaches that address each of these criticisms separately, we propose thatcombining the approaches to simultaneously address both challenges altersthe nature of the predictions. We explore the roles of risk propensity and trustwithin a TCE framework. We then test the ability of these variables to predictvariations in governance between the extremes of market and hierarchy.

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