Transaction Cost Economics

Transaction Cost Economics (TCE) focuses on the organization of transactions that occur whenever a
good or service is transferred from a provider to a user across a technologically separable interface.
When transactions occur within an organization, the transaction costs can include managing and
monitoring personnel and procuring inputs and capital equipment. The transaction costs of buying
the same good or service from an external provider can include the costs of source selection,
contract management, performance measurement, and dispute resolution. Thus, the organization of
transactions, or “governance structure,” affects transaction costs.

TCE and Human Asset Governance

As a way to emphasize the generalizability of TCE, was proposed as a framework for evaluating
governance of human assets based on the dimensions of uncertainty and specificity, which he
reframed as meter ability (i.e., how easily an employee’s output is measured) and specificity (i.e., the
degree to which skills are specialized to a particular employer and non-transferrable). These
dimensions combine to form a 2x2 matrix describing internal governance.

Measurability / Meter ability : how easily an employee’s output is measured .

Specificity : The degree to which skills are specialized to a particular employer and non-
transferrable.
Spot market

Easily measured and easily replaced, examples of spot market human assets include custodial and
farm workers, and some professional careers. In a spot market―Neither workers nor firms have an
efficiency interest in maintaining the association. The Replacement cost is low . eg Farm Workers,
graphic designers

Primitive team

Workers in a primitive team are non-specific, but their output cannot be easily measured on an
individual level, such as with manual freight loading. For e.g.: Porters lifting a weight together,
Offshore Project team working on fixed bid

Obligational market

An obligational market includes employees requiring highly specific knowledge or skills, such as
accountants. Because their specificity makes the employment relationship valuable to both parties,
structures will be in place to prevent either party from terminating the employment relationship
arbitrarily. Such structures may include long vesting periods for retirement or due process
termination procedures.

Relational team

Finally, a relational team is both highly specific and difficult to meter and correspond to the clan
organization. Firms will offer these employees a high level of job security. For e.g Individual Business
Analysts in long term projects

The transaction cost economics (TCE) enables a firm in making choice of two restructuring
alternatives--selling off assets and laying off employees. It hypothesizes that a firm's preference
between sell-off and layoff depends on the underlying transaction costs, which in turn are
contingent on the relative specificity of physical and human assets.

Because transaction costs are largely dependent on asset specificity, the choice between sell-off and
layoff is impacted by the relative specificity of physical and human assets. A highly specific asset is
one that has a much lower value in alternative uses or to other users. By choosing the appropriate
restructuring alternative, a firm can economize on the attendant transaction costs, and stay
competitive. The likelihood of layoff is inversely related to human asset specificity.