Contractual Hazards

• Contractual Hazards include: (a) search and information costs; ((b) policing and enforcement
costs, involved in contracts with any partner.

• Bounded rational managers find it costly to negotiate and write complete contingent claims
contracts that fully describe each party's responsibilities and rights for all future contingencies
that could conceivably arise during a transaction. That is, market contracts are incomplete.

• These costs are those related to establishing and governing exchange relations between firms,
subject to bounded rationality and opportunism. The rationale of the transaction-cost view of
firms and alliance formation rests in minimizing transaction costs.

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 Contractual Hazards

• If the danger of opportunistic behaviour of the linked firms (businesses) is high and expensive safe-
guards are necessary to protect the interests of each firm it is better to integrate the economic
activities into own firm to minimize continuous transaction costs.