Applications of mainstream economic theories to the construction industry: transaction costs

Pioneered by Williamson in the 1970s, transaction cost economics (TCE) at its core addresses the make or buy decision. It posits that the optimum governance structure (i.e. the hierarchy or the market) is the one that achieves economic efficiency through minimisation of transaction costs. Williamson's radical approach departs from economic orthodoxy by integrating economics, law and organisation theory. TCE has influenced scholars in many disciplines. Despite TCE's profound contribution, certain theoretical and empirical issues linger. Early construction economics scholars who applied it opined that TCE has limited explanatory power for construction, especially since many important aspects are excluded from the framework. However, those limitations have not stopped others from employing TCE, usually in a disaggregated form. Such piecemeal approaches should be treated with circumspection. The most promising way forward is for construction economics scholars to adopt pluralism by integrating TCE with other theories for investigation of specific construction economics phenomena.