That all economic transactions are costly in terms of finding, contracting with, and enforcing the arrangement we know from the seminal work of Ronald Coase, winner of the 1991 Nobel prize for economics. Finding the right price to pay among competing, comparable law firms has costs. Competitive bids might minimize those transaction costs in terms of the information obtained, but it still minimizes those costs to build an internal legal team.
This year’s Nobel Laureate, Oliver Williamson of Berkeley, extended the Coasian analysis of transaction costs to consider the complexity of the deal and institutional knowledge. He also “specified measurable attributes of transactions that would make them more or less amenable to being conducted on markets,” according to the Economist, Oct. 17, 2009 at 92. Decisions to provide legal services from inside the company or to procure them from outside fall into a transaction costs analysis (See my post of Aug. 9, 2009: transaction cost economics and five references; and Nov. 8, 2009: transaction costs of arbitration.).