Where Do Transactions Come From? A Network Design Perspective on the Theory of the Firm

48 Pages Posted: 17 May 2006

See all articles by Kim B. Clark

Kim B. Clark

Harvard Business School; National Bureau of Economic Research (NBER); Brigham Young University Idaho

Carliss Y. Baldwin

Harvard Business School

Date Written: May 11, 2006

Abstract

Our goal in this paper is to explain the location of transactions (and contracts) in a larger system of production. We first characterize the system as a network of tasks and transfers. While transfers between agents are necessary and ubiquitous, the mundane transaction costos of standardizing, counting, valuing and paying for what is transferred make it impossible for all transfers to be transactions. We go on to argue that the modular structure of the network determines its pattern of mundane transction costs, and thus establishes where cost-effective transactions can be located.

Keywords: transaction, transaction cost, modularity, encapsulation, information flows, division of cognitive labor, network, network design

JEL Classification: D23, L22, L23, M11

Suggested Citation

Clark, Kim and Baldwin, Carliss Y., Where Do Transactions Come From? A Network Design Perspective on the Theory of the Firm (May 11, 2006). Harvard NOM Working Paper No. 06-12, Available at SSRN: https://ssrn.com/abstract=901790 or http://dx.doi.org/10.2139/ssrn.901790

Kim Clark

Harvard Business School ( email )

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Brigham Young University Idaho

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Carliss Y. Baldwin (Contact Author)

Harvard Business School ( email )

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