Our goal in this paper is to explain the location of transactions (and contracts)
in a system of production.
Systems of production are engineered systems,and where to place "transactions "
is one of the basic engineering problems that the designers of such systems face. We begin by characterizing a system of production as a network of tasks that agents perform and transfers of material,energy and information between and among agents.
We then argue that whereas transfers between agents
are absolutely necessary and ubiquitous in any human-built system of production,
transaction costs make it impossible for all transfers to be transactions. The
particular transaction costs we are concerned with are the so-called “mundane”
costs of creating a transactional interface: the costs of defining what is to
be transferred, of counting the transfers, and of valuing and paying for the
individual transfers. We go on to argue that the modularity of a system of production
determines the system’s pattern of mundane transaction costs. In this fashion,
the engineering design of a system of production necessarily establishes (1)
where transactions can go; and (2) what types of transactions are feasible and
cost-effective in a given location.
Key words: transaction, transaction cost, modularity, encapsulation,
information flows, division of cognitive labor, network, engineering design
JEL Classification: D23, L22, L23, M11
NOM, UNAFFILIATED
47 pages
| Back to 2002-2003 Working Papers | Copyright © President and Fellows of Harvard College