Transaction cost economics (TCE) has emerged as a highly influential theory in macro-management research. However, traditional TCE does not consider the role of systematic decision-making errors in shaping firms’ boundaries. We draw on the heuristics and biases literature to analyze how cognitive biases (errors in decision-making) may shape firms’ boundary decisions in “non-standard” ways. We also show how this literature adds to the core TCE idea that actors need to look ahead, identify potential hazards to exchanges, and deploy repairs and safeguards in contracts and organizational arrangements by pointing to hazards that are rooted primarily in cognition rather than in opportunism. In addition, we show how actors can opportunistically use knowledge of biases in exchanges.
