8/10/2023 0 Comments Transaction cost economics theoryFerreting out tunnelling: An application to Indian business groups. 70, Program in Law and Economics, Harvard Law School, Harvard, Cambridge, MA.īertrand, M., Mehta, P., & Mullainathan, S. The choice between public and private law. An empirical investigation of international marketing ethics: Problems encountered by Australian firms. American Economic Review, 62: 777–795.Īrmstrong, R. Production, information costs, and economic organization. ![]() We suggest a classification of favor trading practices based on their link to formal contracting and rate of recurrence, and describe a range of likely impacts.Īlchian, A. Enforcement mechanisms such as in-group sanctions, access to formal contracting as a complement to favors, possibility of image scoring and incentive compatibility can function as critical components of the trading favors practice. We hypothesize that trading favors will be more prevalent in (1) macro-contexts characterized by a vacuum of formal institutions as well as by excessive formal rules (2) cultural contexts where in-group membership is highly valued (3) high bounded rationality/low bounded reliability contexts where frequent opportunities exist for indirect reciprocity and (4) cases whereby no asset-specific investment(s) in innovation need to be made by the supplier of the favor. From the TCE perspective, trading favors is a component of the relational contracting portion of transaction governance, and contributes to economizing on bounded rationality and bounded reliability. We adopt transaction cost economics (TCE) to analyze systematically trading favors as an economizing practice serving efficiency purposes. To date, a range of theories has been utilized to explore trading favors, but most extant studies focus especially on negative aspects of favors (e.g., corruption and bribery). ![]() Trading favors is a pervasive business practice, especially in emerging economies.
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