Incorporating Informational Demand Uncertainty into Transaction Cost Economics

Abstract

The incorporation of different types of uncertainty into transaction cost economics (TCE) theories of the firm remains an unresolved tension in the literature. One important type of uncertainty is the informational demand uncertainty entrepreneurs face when creating unique new products and services of unknown future value. The purpose of this paper is to identify the main and interactive effects of informational demand uncertainty and asset specificity on entrepreneurs’ firm boundary decisions. The paper combines an experimental research design with a choice based conjoint (CBC) survey to test its hypotheses among a cohort of active, experienced entrepreneurs in the empirical context of the Google Play app store. The paper finds that app development entrepreneurs prefer to offer market-like (rather than hierarchical) financial incentives to software development knowledge suppliers for the creation of new apps when both asset specificity and informational demand uncertainty are high. The paper also identifies the independent effects of asset specificity and informational demand uncertainty on entrepreneurs’ governance preferences. Thus, this paper not only helps clarify an unresolved tension in the TCE literature but also answers repeated calls from the entrepreneurship literature to incorporate informational uncertainty into theories of the firm. The paper also highlights the importance of controlling for product-level sources of informational uncertainty in addition to industry-level sources of environmental research in academic research.