Advanced

Uncertainty, Judgment, and the Theory of the Firm

Hallberg, Niklas Lars LU (2015) In Journal of Institutional Economics 11(3). p.623-650
Abstract
The effects of a truly uncertain future are more far-reaching than what has traditionally been assumed in transaction cost economics. 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.... (More)
The effects of a truly uncertain future are more far-reaching than what has traditionally been assumed in transaction cost economics. 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, transaction cost economics runs the risk of underestimating the degree of vertical integration in actual firms. (Less)
Please use this url to cite or link to this publication:
author
organization
publishing date
type
Contribution to journal
publication status
published
subject
keywords
decision-biases, entrepreneurial judgment, transaction cost economics
in
Journal of Institutional Economics
volume
11
issue
3
pages
623 - 650
publisher
Cambridge University Press
external identifiers
  • wos:000359282800014
  • scopus:84938740848
ISSN
1744-1382
DOI
10.1017/S1744137414000381
language
English
LU publication?
yes
id
7b533f84-4a50-44ea-9f5c-1c226f3a9d1e (old id 4538761)
alternative location
http://journals.cambridge.org/action/displayAbstract;jsessionid=1FE5734A703E3BF0C1D6552E8049A241.journals?aid=9887240&fileId=S1744137414000381
date added to LUP
2014-07-21 10:17:12
date last changed
2017-08-13 03:05:45
@article{7b533f84-4a50-44ea-9f5c-1c226f3a9d1e,
  abstract     = {The effects of a truly uncertain future are more far-reaching than what has traditionally been assumed in transaction cost economics. 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, transaction cost economics runs the risk of underestimating the degree of vertical integration in actual firms.},
  author       = {Hallberg, Niklas Lars},
  issn         = {1744-1382},
  keyword      = {decision-biases,entrepreneurial judgment,transaction cost economics},
  language     = {eng},
  number       = {3},
  pages        = {623--650},
  publisher    = {Cambridge University Press},
  series       = {Journal of Institutional Economics},
  title        = {Uncertainty, Judgment, and the Theory of the Firm},
  url          = {http://dx.doi.org/10.1017/S1744137414000381},
  volume       = {11},
  year         = {2015},
}