Williamson's Transaction Cost Theory

Williamson's Transaction Cost Theory suggests that organizations choose how to organize their activities based on the costs associated with transactions. These costs include finding information, negotiating agreements, and enforcing contracts. When these transaction costs are high, organizations favor hierarchical structures, like internal departments, to reduce uncertainty and oversight costs. Conversely, when transaction costs are low, they might outsource or rely on market exchanges. Essentially, the theory explains why companies balance between doing things internally or contracting out, aiming for arrangements that minimize overall costs and improve efficiency.