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Can someone help me with the concept of transaction cost theory in the context of agency theory??
I think I understand the concept of TC, and how it may affect the decisions of management, for example, whether a company should produce or buy from an external source, depending on the relevant costs of each option.
What I do not understand however, is how this relates to agency theory? Kaplan textbook presents TC theory as an alternative to Agency theory, and I cannot see how this is the case.
Would be interested to hear other peoples thoughts
many thanks
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Transaction cost theory and agency theory essentially deal with the same problem – a conflict of interest between Ds & the S/H’s.
Agency theory is all about relationships and solving problems arising from the relationship between the principal and agent.
Transaction cost theory focuses on individual transactions and the idea that there will be a cost whenever you get someone to do something for you, such as when you get Ds to run your Co.
Transaction cost theory is said to be an alternative to agency theory because the difference between the two is mainly the terminology used to describe essentially the same issues and problems.
Or another way to think of it is by the unit of analysis.
The unit of analysis in agency theory is the individual agent, whereas in transaction cost theory the unit of analysis is the transaction. However, both theories attempt to tackle the same problem.
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