Excerpt from Determinants of Electronic Integration in the Insurance Industry: An Empirical Examination
The general argument of transaction cost analysis is that vertical integration is preferred over market exchange when the sum of transaction and production costs of market exchange exceed those of hierarchy. Critical determining conditions for high transaction costs are environmental or transactional complexity and the existence of transaction-specific assets (williamson, 1975, 1985, 1989; Klein, Crawford, and Alchian, Other environmental and behavioral considerations theorized to exacerbate transaction costs are information asymmetry due to bounded rationality, and opportunism combined with small numbers exchange. The general proposition relating transaction costs and governance mechanisms has been refined over the years with greater distinctions among the various types of asset specificity (transaction-specific know-how; site specificity; physical asset specificity; and dedicated assets), as well as a greater recognition of the existence and viability of intermediate mechanisms of governance (williamson, This theoretical proposition has been increasingly subjected to empirical research. For instance, constructs derived from this model have been adopted as the determinants of: backward integration (monteverde and Teece, 1982; Masten, 1984.
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