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A Quick Introduction to Transaction Costs and Asset Specificity Transaction Cost - Analogous to friction in mechanical systems. Costs arise when parties to an exchange operate disharmoniously, or there are frequent misunderstandings and conflicts lead to delays, breakdowns, or other malfunctions. Transaction cost economics is concerned with the examination of the comparative costs of planning, adapting, and monitoring task completion under alternative governance structures. Behavioral Assumptions - Two assumptions of transaction cost economics: First, the recognition that human agents exhibit "bounded rationality." Bounded rationality means that humans are limited in their ability to formulate and solve complex problems and in their ability to process (e.g., receive, store, retrieve, transmit) information. Given bounded rationality, it is impossible to devise comprehensive or complete "state-contingent" contracts-contracts that anticipate all possible contingency and prescribe a set of rights and obligations for each contingency. Therefore incomplete contracting is the best that can be achieved. Second, humans...

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