Transaction Governance: Firm-Level Influences and the Organizational Identity Paradox

We propose a conceptual framework of transaction governance that augments the existing transaction cost economics (TCE) model with research on organizational identity orientation. Our focus is on how particular identity orientations imply preferences for formal versus informal governance mechanisms. These preferences, in turn, are activated when a firm faces particular transaction hazards. In general, the identity orientation construct augments the current perspective on governance choice and helps expand the current TCE model. We also discuss how a firm’s identity orientation is itself systematically shaped (strengthened or weakened) by transactional outcomes. These feedback processes involve certain paradoxes. For instance, even successfully governed transactions may actually weaken a firm’s identity orientation, to the extent that the governance choice is incompatible with the firm’s prevailing identity orientation.