Coordination Costs

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To be contrasted with Transaction Costs and a key factor in the emergence of peer production.



"Economists typically talk about “transaction costs” but I’m deliberately using the term “coordination costs”. Transactions (a la Coase) typically involve money, and certainly require at least contractual obligations. Coordination by contrast only depends on voluntary cooperation. Transaction costs will always be higher than coordination costs, because transactions require the ability to enforce the terms of the transaction. This imposes additional costs — often enormously larger costs.

As I point out in “The cost of money” introducing money into a relationship creates a floor for costs. I didn’t say it there, but it is equally true that contractual obligations introduce the same kind of floor for costs. Only when a relationship is freely maintained by the parties involved, with no requirement to monitor and enforce obligations, can these costs be entirely avoided.

Not surprisingly, peer production succeeds in domains where people can coordinate without any requirement to enforce prior obligations. Even the most limited enforcement costs typically kill it. Clay Shirky develops this argument in the specific case of Citizendum (a replacement for Wikipedia that attempts to validate the credentials of its contributors)." (