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Uncertainty, judgment, and the theory of the firm

Published online by Cambridge University Press:  13 August 2014

The Institute of Economic Research, School of Economics and Management, Lund University, Lund, Sweden


The effects of a truly uncertain future are more far-reaching than what has traditionally been assumed in transaction cost economics (TCE). Uncertain governance choices require that agents exercise judgment in the absence of other means of estimating the payoffs associated with complex combinations of transaction attributes, contractual contingencies, and governance structures. Judgments are made on an experimental basis to incrementally improve actors’ heterogeneous cognitive representations of the contractual landscape. I argue that uncertain governance choices are subject to specific decision-biases that interact with the potentially corrective function of current organization and asymmetries in actors’ access to decision-supporting systems. These asymmetries may affect the contracting parties’ preferences over differential governance structures. Specifically, by overestimating individual unbiased rationality and disregarding how access to decision-supporting systems may affect governance choice, TCE runs the risk of underestimating the degree of vertical integration in actual firms.

A forum on the judgment-based approach to entrepreneurship
Copyright © Millennium Economics Ltd 2014 

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