Specific investment, economies of scale, and the make-or-buy decision: A test of transaction cost theory

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Abstract

This paper develops empirical tests of three hypotheses arising from transaction cost theory, as developed by Oliver Williamson. Evidence is provided from a new dataset on 178 inputs gathered from UK engineering firms. The probability of buying-in specialised inputs is higher if the production technology is non-specific, but only if there are economies of scale or scope. Furthermore, the economies of scale/scope effect is much reduced in the presence of specific assets. This interactive hypothesis has not been formally tested before. We also believe this to be the first cross-section empirical test of transaction cost make-or-buy theory using European data.
Original languageEnglish
Pages (from-to)431-443
Number of pages13
JournalJournal of Economic Behavior and Organization
Volume26
Issue number3
Publication statusPublished - 1 May 1995

Keywords

  • Contracts
  • Specific assets
  • Transaction costs

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