Transaction cost theory

Transaction cost theory takes into account the assertion that the firm exists because of its capacity to economize on the costs of market-oriented production (Slater & Spencer, 2000). The firm itself emerges as the most superior economic device for the reduction of market costs. Consequently, the efficiency advantages of any organization or firm are regarded by Coase as greatest where long-term contracts are negotiated (Coase, 1937). Long-term contracts -- including contracts and other arrangements that address staffing and employment issues -- will be preferred unless the costs of negotiation and enforcement of separate or short-term market contracts are low. In the context of the present report, transaction costs will be understood in the context of employee turnover, with special reference to the health care industry.

Stiles and Mick (1997) point out tha

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sents an at times excessive level of transaction costs in health care, Murphy and Murphy (1996) contend that when senior leadership turnover rates are considered, these costs become unacceptable. In institutions that were restructuring and downsizing, senior leadership rates of turnover were much higher for organizations that cut staff across the board (48 percent) than for organizations that cut staff on the basis of a restructuring methodology (11 percent). The problem is of particular significance in health care, where turnover rates can exceed 75 percent over a relatively short period of time (White, 1995). Turnover has the effect of draining profits and adversely affects the businesses' overall efficiency. Many health care institutions operate on a profit margin of only 5-10 percent, a fact which increases the negative effects of high employee turnover rates. Tangible costs include time involved for recruitment, selection, and training of new personnel. As White (1995) claims, these are real costs in terms of advertising expenses and manpower. The time that a supervisor spends in the hiring process could otherwise be devoted to managing his or her every day functions. For large health care institutions, a high empl
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Approximate Word count = 1799
Approximate Pages = 7 (250 words per page)

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