Signifying Williamson's Contribution to Coase's Transaction Cost Approach: An Agent-Based Simulation of Transaction Costs and Specialization

Abstract

This paper simulates Ronald Coase’s transaction cost approach to firm organizing using agent-based modeling, and contextualizes and contrasts it with the earlier division-of-labor/specialization theory of the firm that Coase challenged and sought to replace. The simulation tests firm emergence by targeting the difference between the theories, especially Coase’s rejection of specialization as an explanation for integration in the firm. The results show little support for, and suggest a shortcoming to, Coase’s transaction cost theory. These findings indicate a potential relationship between the pre-Coasean theory and Williamson’s Transaction Cost Economics, which can help shed light on the latter’s significant influence in the theory of the firm.

Keywords: agent-based model, firm emergence, simulation, transaction costs