Contractual Commitments, Bargaining Power, and Governance Inseparability: Incorporating History Into Transaction Cost Theory

Abstract

We extend transaction cost economics by arguing that prior contractual commitments made by a firm can limit its ability to differentiate or change its governance arrangements in the future—a condition we term governance inseparability. Changes in bargaining power between a firm and its exchange partners also can result in governance inseparability. Consequently, governance choice may be more particularistic than the current version of transaction cost economics allows. We provide several testable propositions.