The importance of management and transaction costs for large UK firms

Abstract

This article develops an approach to the firm using the principle that any organization is an amalgam of two production functions: a control function and a real function. The resulting non-linear regression equation allows estimation of model parameters that can be used to calculate firm-specific production and transaction costs. The paper uses a sample of large UK firms for the four years 1980, 1986, 1992 and 1997. The parameter and cost estimates appear intuitively plausible given developments in competitive conditions and environmental uncertainties. Broadly speaking the results support the view that transaction cost economizing is a primary determinant of improved firm performance. This result is particularly apparent when monopoly power and the positive dynamic advantages of firm slack are identified.