Transaction costs and the governance of social innovation

Transaction cost economics and the new institutional economics have produced acomparative static apparatus capable of predicting the equilibrium mode of governance fortransactions depending on the frequency, uncertainty and asset specificity of the transaction.There is substantial empirical support for the predictions of transaction cost economics.Innovation is by nature dynamic, but it is argued that each of the stages of innovationrequires equilibrium to persist for long enough for the innovative process to reach the nextstage. Transaction cost economics defines three generic forms of governance: market,hybrid and hierarchy. It is argued that each of these forms of governance is appropriate forone of the specific stages through which a social innovation must pass.An implication of this argument is that applying the wrong governance to a stage in theinnovation process leads to failure of the innovation to proceed. The paper applies thisapparatus to some social innovations in South Australia.