Transaction cost/Transaction theory

Hi,
As I understood this theory, it is useful when the company considers whether to outsource activities or produce products/services in-house.
Transaction cost theory allows to account not only market prices, but also costs that connected with transaction (say, with outsourcing). Thus, decision whether to outsource could be based taking into account such transaction costs, as costs connected with searching of outsourcer, meetings with him, risks that are connected with outsourcer, etc.

Hello, my understanding of transaction cost theory is as follows.

Directors, who represent the company, enter into transactions which will involve costs such as purchasing supplies.
There is a risk that directors, who have a fiduciary duty to shareholders, may not make the best purchasing decision.

The risk of not making the best decision is divided into two : Bounded Rationality and Opportunism.

Bounded Rationality is where the directors did not make the best purchasing decision due to him not fully understanding the situation of the transaction, such as not making a proper analysis of the best suppliers and make decisions based on his own instinct.

Opportunism is where the directors did not make the best purchasing decision due to him fulfilling his own self-interest, such as purchasing low quality materials with low prices. He may want to achieve cost reduction targets which will earn him bonuses.

I hope the above will help you understand better regarding this theory. All the best for your exam.