Bad for Practice: A Critique of the Transaction Cost Theory

Management Fashion Pay-for-Performance for CEOs

“…Thus, they have to be motivated extrinsically and the exclusionary effect of intrinsic motivation sets in. As a consequence, wrong theories guide management and policy decisions (Ghoshal and Moran (1996)). Second, Ferraro, Pfeffer, and Sutton (2005) state that in social sciences, theory becomes a normative guidance on how to act, which itself sets a self-fulfilling prophecy in motion.…”

Cognitive control and socially desirable behavior: The role of interpersonal impact

“…Assumptions about whether and when humans are impulsively self-serving lead to choices about how to structure and configure institutional arrangements. The image of humans as being self-serving leads to the creation of workplaces where employees are subject to surveillance, excessive rules and tight contracts (Etzioni, 1988;Ghoshal & Moran, 1996;Schwartz, 1997). For example, based on their findings COGNITIVE CONTROL AND SOCIALLY DESIRABLE BEHAVIOR 4 that cognitively depleted individuals cheat more, Gino et al (2011) concluded that "managers and organizations should focus on removing temptations, developing self-control, and monitoring individuals who are likely to be depleted" (p. 200).…”

Human Capital and Transaction Cost Economics

“…Since its takeoff in the mid-1970s, TCE has continuously been subject to strong criticism, in the beginning mainly from Marxists (Marglin, 1974) and sociologists (Perrow, 1986), but increasingly from management scholars (e.g., Kogut and Zander, 1992;Ghoshal, 1994;Ghoshal and Moran, 1996). The treatment in the theory of the employment relation and human capital has been criticized in particular.…”

“…Some such criticisms (e.g., that the theory assumes all agents to be opportunists) can be dismissed as demonstrably false. However, according to a recent critique, which is not so easily dismissd, a primary problem with the treatment of motivation in TCE is not opportunism per se, but rather that modern economic approaches assume that all motivation is of the "extrinsic" type (Ghoshal and Moran, 1996;Osterloh and Frey, 2000). In other words, all behavior is understood in terms of encouragement from an external force, such as the expectance of a monetary reward.…”