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'For a firm, the advantages and disadvantages of relying on the market versus relying on internal...

'For a firm, the advantages and disadvantages of relying on the market versus relying on internal organisation can be expressed in terms of a trade-off between technical efficiency and agency efficiency.' Do you agree or disagree with this statement? Justify your answer.

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Answer #1

I agree with the statement.

Organization always evaluates technical efficiency and agency efficiency to take the right decision. It means that organization evaluates the advantages gained and disadvantages incurred if a  decision is to be taken. If advantages are more than the disbenefits, then decision is taken and if reverse is true, then decision is changed. So, it is the technical efficiency, meaning producing themselves at lowest cost or agency efficiency meaning acquiring the same goods with the lowest transaction cost.

For example, a make or buy decision that has both advantages and disadvantages, requires a firm to make a trade off between technical efficiency and agency efficiency so that the right decision is taken. On a similar note, either going for the integration or outsourcing also relies on this tradeoff to take the right decision.

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