Legal departments viewed as reducing transaction costs or increasing resource benefits: two theories of economists

The Economist, Dec. 18, 2010 at 134, contrasts the transaction-cost view of the business world with the resource-based view. Management theorists who champion the resource-based view “argue that activities are conducted within firms not only because markets fail, but also because firms succeed: they can marshal a wide range of resources – particularly nebulous ones such as ‘corporate culture’ and ‘collective knowledge’ – that markets cannot access” (See my post of July 20, 2010: resource dependence theory.).

In other words, difficulties and costs of contracts with providers, which are shortcomings of the market solved by companies that employ the providers, are not the only reason for a company or a legal team. The costs of transactions with law firms are not the only reason why companies establish in-house legal groups (See my post of March 24, 2010: alternative fees and transaction costs; Nov. 19, 2009: Coasian analysis with 6 references.).

The cumulative benefits of resources meshing together, such as collegiality, loyalty, and backup support along with the two mentioned above – culture and institutional knowledge, find justification in the resource-based theory of collective advantage. Transaction costs look mostly outside for their advantages; resource dependency takes a more internal perspective.