Transaction Cost Economics

Introducing the transaction cost economics (TCE), the article, as its main concerns, tries to explain the method of making the concept of transaction cost operational and applying it in empirical studies. In this paper, the writer tries to provide some answers to these questions: How do followers of institutionalism and transaction cost economists use this concept in practice and empirical studies? And basically, do they have any coherent method to deal with subject matters of economics or that institutional approach is only story telling? New institutional economics (NIE) are divided into two main areas; institutional environment and institutional arrangement. TCE is related to the institutional arrangement and Williamson has related it into governance structure. Coase's article entitled "The Nature of the Firm" is the beginning of this approach which emphasizes the firm must be considered as a governance structure, rather than a production function or a technological construction. TCE tends to make the concept of transaction cost operational and for achieving this purpose, uses the idea of firm as a governance structure and develop "discriminating alignment" hypothesis.