The Economics of Governance: Framework and Implications

neglected on the research agenda, in large measure because neoclassical price theory is poorly suited to address it1. Thus orthodoxy holds that the allocation of economic activity as between firms and markets is a datum; firms are production functions; markets are signaling devices; contracting is accomplished through an auctioneer; and disputes are disregarded because of the presumed efficacy of court adjudication. The economic purposes served by organizational variety do not arise within - indeed, are effectively beyond the reach of- this framework. Transaction cost economics approaches the study of economic organization very differently. Thus firms, markets, and mixed modes are regarded as alternative means of organization, the allocation of economic activity among which is a decision variable. Firms, moreover, are described as governance structures, the internal organization of which has real economic consequences. An assessment of the contracting process runs the gamut from faceless transactions of the kind that are adequately serviced by auctioneers to complex bilateral trades in which the identity of the parties matters critically. And the legal centralism tradition, under which court adjudication is presumed to be efficacious, is supplanted by the study of private ordering. Rather than disregard it, organizational variety is centrally located on the research agenda. Transaction cost economics joins aspects of law, economics, and organization theory in an effort to deepen organizational insights and develop refutable