The Role of Opportunism in Transaction Cost Economics

Abstract

This paper attempts to evaluate the concept of opportunism and the role it plays within transaction cost economics (TCE). In particular, the paper questions the ubiquitous character of opportunism and the efficiency of governance structures built on it. It contends that a TCE failure to account for the diversity of human motivation and its asymmetric use of opportunism imply inefficiencies in organizational design. Biases in internal administrative systems lead to a neglect of the potential efficiency gains associated with the adoption of more participatory work organization structures. The analysis lends support to the view that the TCE presumption of an efficiency rationale for observed administrative structures is not always valid. The paper commences with a brief review of relevant TCE concepts. This is followed by an examination of the role assigned to opportunism within TCE. Since internalization, organizational form, and size are shown to depend significantly on opportunism, a critical evaluation of the assumption of opportunism and its role within TCE follows. The contention is that hierarchical structures can have adverse effects on behavior and that biases and theoretical inconsistencies in the utilization of opportunism exist. Failure to admit that individuals in positions of authority may exploit authority relations opportunistically implies that systems are designed without safeguards against subordinate exploitation leading to inefficiencies. Furthermore, the presumed enhancement in the allocative efficiency of multidivisional firms is shown to be inconsistent with the basic premises of TCE. The paper concludes by drawing together the main threads of the argument.