Transaction Cost Theory

Transaction Cost Theory explains that organizations and individuals choose how to organize their activities based on the costs of making transactions—such as finding information, negotiating agreements, and enforcing contracts. If these costs are high, they may choose to perform tasks internally (inside the organization). If they are low, they might rely on external markets or partners. The theory helps explain why companies decide to outsource some functions or keep others in-house, aiming to minimize overall costs and improve efficiency in their operations.