Does Transaction Cost Theory Explain Information Systems Outsourcing in the U.S Government?: An Empirical Test

Abstract

The explanatory power of transaction cost theory has been demonstated in the management of non-information system(IS) arenas. This theory assumes that human being s display bounded rationality and opportunistic behavior, which is then passed to the organization and market. Therefore, such behavior assumed by transaction cost theory leads to organizational and market failures downstream. In order to reduce the level of these failures, the theory suggests insourcing or outsourcing for certain goods or services. Since this theory has been found to explain managerial decisions in non-IS areas, this research examines whether the theory holds the same explanatory power in the IS arena. Research results showed that the theory does not appear to hold in the area to IS management. The resource-based perspective may provide a more appropriate alternative in understanding decision-making in regards to IS outsourcing within city governments.