Transaction Costs and Delegation

John Cook considers the question of whether to delegate and shows that it is both more interesting and more complicated than it looks:

Comparative advantage is often illustrated by a hypothetical lawyer and an assistant. A lawyer who can type very quickly is still better off hiring someone else to do the typing because he can make much more per hour practicing law. If he could type twice as fast as an assistant, and he could earn more than twice as much practicing law as it costs to hire an assistant, he makes money by delegating.

This illustration makes sense at one level, but it also sounds a little quaint. In fact lawyers do quite a bit of typing. That's explained by another economic idea: transaction costs. It costs time to recruit and hire an assistant. And once you have an assistant, it takes time to explain what you want done, time to wait for the work to come back, time to review the work, etc.

Highly paid executives type their own emails, at least some of the time, because it's not worth the transaction costs to have someone else do it. But for a larger task, say typing up hundreds of handwritten pages, it's worth paying the transaction costs to get someone else to do the typing.

Not only do many executives type some of their own emails, they probably do so out of common sense, and without really thinking about it. Sometimes, though, it pays to take the time to understand explicitly what many understand only on an intuitive level. I am sure there are lots of people who nail this exception to the Law of Comparative Advantage without having heard of it or even knowing what "transaction cost" means. Such people may therefore fail to recognize other situations in which a similar analysis applies.

-- CAV