Lawyers as Transaction Cost Engineers

Ronald J. Gilson, Columbia Law School


Recognition that organizational and transactional structure can be understood as mechanisms that economize on information, bargaining, and agency costs has given rise to a large and important literature that explains the existence and efficiency of particular institutional arrangements by reference to the transaction cost properties of the activity involved. The question, then, is what mechanisms drive the transaction cost economizing process itself. One might simply rely on the assumption of competition. But it would be strange if an economic orientation that focused on market imperfections to explain observed patterns of organizing economic activity fell back on the invisible hand (and the institutionless features) of market driven selection to explain the mechanisms of transaction cost economizing. This paper examines the role of business lawyers as transaction cost engineers whose function is to act as organizational intermediaries, designing transaction cost efficient structures through which to carry out productive activities.