Muhammad Mubeen

17-ARID-2669

BS Economics (7th)              

Assignment

Organizational Examples of Transaction Cost Theory and Motivation theory

Transaction Cost Theory:

       It is related to the problems of coordination and motivation.

It has two types:

 Co-ordination Costs
 Motivation Costs

Co-ordination Costs

       It has a further three types:

 Search Costs
 Bargaining Costs
 Contracting Costs

 Search Costs:

       Both buyer and seller search for information before completing the transactions.

For Example:

Outside the Organization:        

When an organization is trying to buy the rival organization then both buyer and seller
will look for information. Buyer will look for how much profit and revenues that rival but the
small firm is making. And Seller will look for its benefits that will be able to get complete
money if I make that deal. Is that buying organization capable?
 

Within the Organization:

If a new alternative of equipment is available in the market now which is more efficient.
Then the person or group of employees running that equipment must pass their word regarding
that equipment to the central decision makers. Decision makers will then do their own research
and then order the purchase of the equipment.

Bargaining Costs:

       These are more relevant when costs are involved when negotiations for major
transactions can be protracted, but even within the firm, salary and wage negotiations can be
costly in terms of the times and parties involved. 

For Example:                           

         Like in these times, a firm wants to have maximum protection of its employees from the
virus. So, it will buy sanitizers and masks. And it will decide from where to buy and then that
firm will try to do bargaining with that medical firm in costs of those of products.

Contracting Costs:

       These costs are associated with drawing up contracts; these take managerial time and can
involve considerable legal expense.

For Example:

         A Fast Food chain made a contract with Construction Company. Fast Food chain wants
the building to be made in minimum cost possible. There will be negotiations regarding the
design, construction material, construction time between the companies. The Fast Food chain
will then reimburse some amount if they reach an agreement.

 
Motivation Costs
         It is often called as ‘agency costs’.

It has two types:

 Hidden Information
 Hidden Action

Hidden Information:

       It is related to asymmetries involved in contracting.

One or more parties involved in a transaction may have more information relevant to the
transaction than others.

 For Example:

       In online buying, many sellers hide the complete detail of the product or its flaws and
when it is received it has not that complete features or parts or accessories.

Hidden Action:

       Even when the contract has been imposed then the parties involved have to keep an eye
on the activities of the organization. This is even more costly, monitoring, and this behaviour is
more difficult to observe. This is referred to as, ‘moral hazard’.

For Example:

         When international finance institutions lend money to countries or big conglomerates
then they have to keep an eye on the actions of the receiver to ensure that the money is being
used for the purpose for which it is being borrowed.

 
Motivation Theory:
Adam Smith stated:

         ‘It is not from the benevolence of the butcher, the brewer, or the baker that we expect our
dinner, but from their regard to their own interest’.

Edgeworth said:

         ‘The first principle of Economics is that every agent is actuated only by self-interest.’

 It has two further types:

 Altruistic Behaviour
 Spiteful Behaviour

Altruistic Behaviour:

       Any behaviour which provides benefits to others while involving a cost to the originator
of the behaviour, with no corresponding material benefit.

For Example:

         There is an organization working with the aim to succeed by optimal use of employees
skills. And in order to grind out the maximum output of employees then organization obliges
employees in breakfast, lunch. Company obliges employees in transport in the shape of giving a
vehicle or travelling allowance, so that employee can work with full satisfaction. It will then
result in maximum performance of the organization.

Spiteful Behaviour:

       Any behaviour which imposes costs on others, while also imposing a cost on the
originator of the behaviour, with no corresponding material benefit.

For Example:

         It is a behaviour which is taken out in response.

If an employee submits a request of resignation in a private organisation then at first firms refuse
to accept it. In most cases, they then try to overburden the employee in his last days and they also
then delay the wage of that last month or even refuse to pay it. This Spiteful Behaviour is mostly
of medium-sized firms.