The impact of contractor selection method on transaction costs: a review

The basic premise of transaction-cost theory is that the decision to outsource, rather than to undertake work in-house, is determined by the relative costs incurred in each of these forms of economic organization. In construction the "make or buy" decision invariably leads to a contract. Reducing the costs of entering into a contractual relationship (transaction costs) raises the value of production and is therefore desirable. Commonly applied methods of contractor selection may not minimise the costs of contracting. Research evidence suggests that although competitive tendering typically results in the lowest bidder winning the contract this may not represent the lowest project cost after completion. Multi-parameter and quantitative models for contractor selection have been developed to identify the best (or least risky) among bidders. A major area in which research is still needed is in investigating the impact of different methods of contractor selection on the costs of entering into a contract and the decision to outsource.

Transaction costs, information technologies and the choice of marketplace among farmers in Northern Ghana

Using a transactions costs framework, we examine the impact of information and communication technologies (mobile phones and radios) use on market participation in developing country agricultural markets using a novel transaction-level data set of Ghanaian farmers. Our analysis of the choice of markets by farmers suggests that market information from a broader range of markets may not always induce farmers to sell in more distant markets; instead farmers may use broader market information to enhance their bargaining power in closer markets. Finally, we find weak evidence on the impact of using mobile phones in attracting farm gate buyers.

The transaction cost economics theory of the family firm: family-based human asset specificity and the bifurcation bias

We develop a transaction cost economics theory of the family firm, building upon the concepts of family-based asset specificity, bounded rationality, and bounded reliability. We argue that the prosperity and survival of family firms depend on the absence of a dysfunctional bifurcation bias. The bifurcation bias is an expression of bounded reliability, reflected in the de facto asymmetric treatment of family vs. nonfamily assets (especially human assets). We propose that absence of bifurcation bias is critical to fostering reliability in family business functioning. Our study ends the unproductive divide between the agency and stewardship perspectives of the family firm, which offer conflicting accounts of this firm type's functioning. We show that the predictions of the agency and stewardship perspectives can be usefully reconciled when focusing on how family firms address the bifurcation bias or fail to do so.

What are the costs of procurement and who bears them?

The costs of procurement are transaction costs which are separate from the direct costs of a project. In this paper discussion is concentrated on costs of tendering. Types of cost, including money costs and opportunity costs, short-term and long-term costs, private and social costs are defined and examined in relation to various types of product and methods of procurement. The costs of the contractor and of the client are considered and tentative conclusions drawn as to who bears these costs in the short-run and in the long run. They may fall on the parties to the process for the particular project, on other contractors and clients or on society as a whole.

The impact of procurement method on costs of procurement

Collaborative working methods offer the hope of reduced waste, lower tendering costs and improved outputs. The costs of tendering may be influenced by the introduction of different working methods. Transaction cost economics appears to offer an analytical framework for studying the costs of tendering, but it is more to do with providing explanations at the institutional/industry level, not at the level of individual projects. Surveys and interviews were carried out with small samples in UK. The data show that that while tendering costs are not necessarily higher in collaborative working arrangements, there is no correlation between costs of tendering and the way the work is organized. Practitioners perceive that the benefits of working in collaborative procurement routes far outweigh the costs. Tendering practices can be improved to avoid waste, and the suggested improvements include restricting selective tendering lists to 23 bidders, letting bidders know who they are competing with, reimbursing tendering costs for aborted projects and ensuring that timely and comprehensive information is provided to bidders.

Comparative costs of the commercial process in different construction procurement methods

The commercial process in construction projects is an expensive and highly variable overhead. Collaborative working practices carry many benefits, which are widely disseminated, but little information is available about their costs. Transaction Cost Economics is a theoretical framework that seeks explanations for why there are firms and how the boundaries of firms are defined through the “make-or-buy” decision. However, it is not a framework that offers explanations for the relative costs of procuring construction projects in different ways. The idea that different methods of procurement will have characteristically different costs is tested by way of a survey. The relevance of transaction cost economics to the study of commercial costs in procurement is doubtful. The survey shows that collaborative working methods cost neither more nor less than traditional methods. But the benefits of collaboration mean that there is a great deal of enthusiasm for collaboration rather than competition.

Threshold effects in price transmission: The case of Brazilian wheat, maize, and soya prices

Recent studies into price transmission have recognized the important role played by transport and transaction costs. Threshold models are one approach to accommodate such costs. We develop a generalized Threshold Error Correction Model to test for the presence and form of threshold behavior in price transmission that is symmetric around equilibrium. We use monthly wheat, maize, and soya prices from the United States, Argentina, and Brazil to demonstrate this model. Classical estimation of these generalized models can present challenges but Bayesian techniques avoid many of these problems. Evidence for thresholds is found in three of the five commodity price pairs investigated.

Timing and the holding periods of institutional real estate

Literature on investors' holding periods for securities suggests that high transaction costs are associated with longer holding periods. Return volatility, by contrast, is associated with shorter holding periods. In real estate, high transaction costs and illiquidity imply longer holding periods. Research on depreciation and obsolescence suggests that there might be an optimal holding period. Sales rates and holding periods for U.K. institutional real estate are analyzed, using a proportional hazards model, over an 18-year period. The results show longer holding periods than those claimed by investors, with marked differences by type of property and over time. The results shed light on investor behavior.

The (de)merits of minimum-variance hedging: application to the crack spread

We study the empirical performance of the classical minimum-variance hedging strategy, comparing several econometric models for estimating hedge ratios of crude oil, gasoline and heating oil crack spreads. Given the great variability and large jumps in both spot and futures prices, considerable care is required when processing the relevant data and accounting for the costs of maintaining and re-balancing the hedge position. We find that the variance reduction produced by all models is statistically and economically indistinguishable from the one-for-one “naïve” hedge. However, minimum-variance hedging models, especially those based on GARCH, generate much greater margin and transaction costs than the naïve hedge. Therefore we encourage hedgers to use a naïve hedging strategy on the crack spread bundles now offered by the exchange; this strategy is the cheapest and easiest to implement. Our conclusion contradicts the majority of the existing literature, which favours the implementation of GARCH-based hedging strategies.

Training to address attitudes and behaviour of rural bank managers in Madhya Pradesh, India: A programme to facilitate financial inclusion

Given their physical presence in India, banks are arguably well-placed to improve financial inclusion in rural areas. However, uncertain repayment capacities and high transaction costs mean formal financial institutions are often reluctant to lend to the rural poor. Conversely, high transaction costs in dealing with banks are also incurred by clients, through, for example, lengthy, cumbersome and potentially ignominious procedures. Negative attitudes towards poor clients can be an important component of such transaction costs. An applied research project funded by the Enterprise Development Innovation Fund (EDIF-DFID) developed an innovative training programme designed to encourage more positive attitudes of bank staff towards poor clients, and towards their own role in rural poverty alleviation and development. This paper examines the development of the training programme, its implementation, and the results of its evaluation. It is shown that training can bring about attitudinal change, which in turn is reflected in behaviour and social impact.

The competitive dialogue procedure: Advantages, disadvantages, and its implementation into English and Dutch law

Competitive Dialogue (CD) is a new contract award procedure of the European Community (EC). It is set out in Article 29 of the 'Public Sector Directive' 2004/18/EC. Over the last decades, projects were becoming more and more complex, and the existing EC procedures were no longer suitable to procure those projects. The call for a new procedure resulted in CD. This paper describes how the Directive has been implemented into the laws of two member states: the UK and the Netherlands. In order to implement the Directive, both lawmakers have set up a new and distinct piece of legislation. In each case, large parts of the Directive’s content have been repeated ‘word for word’; only minor parts have been reworded and/or restructured. In the next part of the paper, the CD procedure is examined in different respects. First, an overview is given on the different EC contract award procedures (open, restricted, negotiated, CD) and awarding methods (lowest price and Most Economically Advantageous Tender, MEAT). Second, the applicability of CD is described: Among other limitations, CD can only be applied to public contracts for works, supplies, and services, and this scope of application is further restricted by the exclusion of certain contract types. One such exclusion concerns services concessions. This means that PPP contracts which are set up as services concessions cannot be awarded by CD. The last two parts of the paper pertain to the main features of the CD procedure – from ‘contract notice’ to ‘contract award’ – and the advantages and disadvantages of the procedure. One advantage is that the dialogue allows the complexity of the project to be disentangled and clarified. Other advantages are the stimulation of innovation and creativity. These advantages are set against the procedure’s disadvantages, which include high transaction costs and a perceived hindrance of innovation (due to an ambiguity between transparency and fair competition). It is concluded that all advantages and disadvantages are related to one of three elements: communication, competition, and/or structure of the procedure. Further research is needed to find out how these elements are related.

Training to address attitudes and behaviour of rural bank managers in Madhya Pradesh, India: a programme to facilitate financial inclusion

Given their physical presence in India, banks are arguably well-placed to improve financial inclusion in rural areas. However, uncertain repayment capacities and high transaction costs mean formal financial institutions are often reluctant to lend to the rural poor. Conversely, high transaction costs in dealing with banks are also incurred by clients, through, for example, lengthy, cumbersome and potentially ignominious procedures. Negative attitudes towards poor clients can be an important component of such transaction costs. An applied research project funded by the Enterprise Development Innovation Fund (EDIF-DFID) developed an innovative training programme designed to encourage more positive attitudes of bank staff towards poor clients, and towards their own role in rural poverty alleviation and development. This paper examines the development of the training programme, its implementation, and the results of its evaluation. It is shown that training can bring about attitudinal change, which in turn is reflected in behaviour and social impact. Copyright © 2007 John Wiley & Sons, Ltd.

Direct investment in real estate

Momentum strategies have the potential to generate extra profits in private real estate markets. Tests of a variety of frequencies of portfolio reweighting identify periods of winner and loser performance. There are strong potential gains from momentum strategies that are based on prior returns over a 6- to 12-month period. Whether these gains are attainable for real-world investors depends on transaction costs, but some momentum strategies do produce net excess returns. The findings hold even if returns are unsmoothed to reflect underlying market prices.

Timing and the holding periods of institutional real estate

The literature on investors’ holding periods for equities and bonds suggest that high transaction costs are associated with longer holding periods. Return volatility, by contrast, is associated with short-term trading and hence shorter holding periods. High transaction costs and the perceived illiquidity of the real estate market leads to an expectation of longer holding periods. Further, work on depreciation and obsolescence might suggest that there is an optimal holding period. However, there is little empirical work in the area. In this paper, data from the Investment Property Databank are used to investigate sales rate and holding period for UK institutional real estate between 1981 and 1994. Sales rates are investigated using the Cox proportional hazards framework. The results show longer holding periods than those claimed by investors. There are marked differences by type of property and sales rates vary over time. Contemporaneous returns are positively associated with an increase in the rate of sale. The results shed light on investor behaviour.

The distribution of London residential property prices and the role of spatial lock-in

Much of mainstream economic analysis assumes that markets adjust smoothly, through prices, to changes in economic conditions. However, this is not necessarily the case for local housing markets, whose spatial structures may exhibit persistence, so that conditions may not be those most suited to the requirements of modern-day living. Persistence can arise from the existence of transaction costs. The paper tests the proposition that housing markets in Inner London exhibit a degree of path dependence, through the construction of a three-equation model, and examines the impact of variables constructed for the 19th and early 20th centuries on modern house prices. These include 19th-century social structures, slum clearance programmes and the 1908 underground network. Each is found to be significant. The tests require the construction of novel historical datasets, which are also described in the paper.