||In this paper I describe Oliver Williamson's theory of Transaction Cost Economics (Williamson, 1971, 1985, 1996, 2000). His theory gives a comparative account of two different mechanisms of coordination: the mechanism of free choice (the market coordination mechanism) and the mechanism of central planning. He especially highlights an important and frequently occurring market failure: the breakdown of co-operation when specific investments are involved. This can also be seen as a coordination failure; the market coordination mechanism fails to realise a profitable cooperation. As the breakdown of co-operation involves a loss of profit, certain second-best arrangements can be designed, to reap at least part of the lost profit. These arrangements are mainly of an institutional character; they involve complex contracting practices and, in the extreme, the emergence of a unified firm (which amounts to the replacement of the market coordination mechanisms by the central planner mechanism). This analysis is highly relevant for transforming countries, as in these countries the social, legislative and judicial order are not so strong, which makes the breakdown or failure of co-operation more likely. Transaction Cost Economics explicitly addresses this issue, while the mainstream approach seems to ignore the importance of institutions for the functioning of an economy. Furthermore, even though Transaction Cost Economy is firmly grounded in "the economic approach", it doesn't feature the radical reductionism of the mainstream neoclassical approach. Maximising behaviour is a dominant principle, but it takes place in an institutional setting against a social-cultural background. This more holistic approach allows results from other social sciences, such as law, organisational sciences, sociology and (social) psychology to be incorporated.