Transaction Cost Theory and Business Legitimacy

Abstract

The importance of business legitimacy is continuously increasing. Beyond economic interests, companies are incorporating social responsibility and human rights management on both a voluntary and an obligatory basis, thereby strengthening their legitimacy. From a scientific perspective, there is potential for further research to combine economic theory and the concept of business legitimacy. The following discussion aims to develop an approach in this direction, presenting literature from the fields of business legitimacy as well as transaction cost theory and integrating these. Three different levels (the institutional, the organizational, and the individual) are observed in this context. The discussion indicates that business legitimacy particularly impacts transaction costs in a positive and negative way. A possible mechanism for gaining legitimacy and reducing transaction costs is a stakeholder advisory board in combination with a values management system. In this emergent field for research, these findings can be further developed and discussed in the context of various situations. In practice, it is important to consider stakeholders’ norms and values when conducting transactions. When organizations are increasingly likely to undertake sovereign tasks, or when legal enforcement is weak, especially in a global context, the legitimacy of organizations’ transactions becomes relevant. The clear distinction between legitimacy, which is determined by ethical expectations, and legality, which refers to public regulation, is of paramount importance in this discussion.