Costly Control: An Examination of the Trade-off Between Control Investments and Residual Risk in Interfirm Transactions
Transaction cost economics predicts that investments in management control will enable risky interfirm transactions. Risk is rarely eliminated, because firms trade off costs of management control and expected costs of control loss (together, the “cost of control”). The solution typically comprises a mix of control investments with residual performance and residual relational risks. Transaction cost economics also predicts that the control-residual risk trade-off will vary with the cost of control.