Question

According to transaction cost theory, what motivates organizations to for minter-organizational linkages? Under what conditions would a company prefer a more formal linkage mechanism to a less formal one?

Answer 1

According to the transaction cost theory, the organizations aim at minimizing the cost involved in exchanging the required resources from the environment. The inter-organizational linkages help in reducing the uncertainty, the risk as well as the cost involved in obtaining the resources from the environment. The inter-organizational strategies are chosen by the organizations which reduce the transaction as well as the bureaucratic costs.

These inter-organizational linkages mechanisms include formal and informal types. The formal mechanisms are contracts and reputation whereas the informal mechanisms are merger and takeover. The following are the conditions under which a more formal linkage would be preferred by an organization:

a. The organization exchanges specific goods

b. Greater uncertainty

c. Potential exchange partners are less