Friday, September 13, 2013

Transaction Costs of a Family Business

College is a busy time for everyone, especially those who want to juggle part-time work, a heavy course-load and/or extra-curriculars, all on the same platter. As an undergraduate, I have met many students who have spoken about the opportunity costs of either studying hard and getting perfect grades or engaging in many extra-curriculars for a social edge, at the sacrifice of achieving a high semester GPA. Part-time work can be a very large commitment for college students, especially if he or she decides that the work is not a good fit shortly after becoming employed or if the time put into the job turns out to be inconvenient and gives the student a substantial amount of stress. I have a close friend in Chicago who is an engineering student and used to have a part-time job working in her family convenience store. My friend had been contributing to the store since she was 14. By the time she was in high school, her commitment to her family business had become a part-time job and her parents expected her to work at the store 3-4 hours a day. In high school, my friend was active in the Asian American Club and Key Club. Homework was also not a big issue for her so it seemed that the part-time job was not a bother at all at the time.

When my friend enrolled into IIT as an electrical engineering major, she had her mind set to continue working at the convenience store. She believed that she would be able to juggle her course-load and her family commitment without too much sacrifice on her grades. Her parents were still pretty staunch about her help around the store as their proficiency in English was not high, they did not want to hire too many "outside" employees, and they only trusted family to work the cash register. For the first week, my friend was able to prioritize her time well and managed to keep on track with all of her coursework. However, when the course material started increasing in difficulty, she immediately felt the weight of her responsibilities, especially for her physics II and engineering project courses which took up a lot of her time. Eventually, after taking her first midterm, my friend decided to let her parents know that she will be putting in less time in at the store, certainly not daily work, and her parents finally decided to let her off. Her brother has taken over her work as the cashier ever since.

There were undoubtedly many costs associated with my friend's circumstance. For one, even to start the family business was a substantial investment on the part of her parents. Living in neighborhood where there were other convenience stores a block away, starting a convenience store can be very risky if you aren't knowledgeable of what suppliers to do business with, what contacts you should have for transportation of goods, or even an acceptable rent rate if you are leasing property for the store. Luckily my friend's family steadily began making a profit and, as of now, the store is still open. Another transaction cost that I elaborated on was my friend's cost of study time. Once she made the agreement to work at the store after her classes were finished, she was giving up time she could have spent studying over material or joining clubs. Yet another transaction cost, though unique to her, was forgoing pay that may have been higher than what she was being paid had she decided to work somewhere else. Sometimes, steep transaction costs are overlooked if the job means a lot to a person, even if the payoff is less.


  1. The trade-off is not only among family businesses, but also for most part-time jobs in universities and colleges. Students typically work for more than 15 hours per week for a part-time job; they might be able to utilize this amount of time to do other things, like going to office hours or even hanging out with friends.
    I used to work in cafe in out school when I was in the first year; however, as courses became much more challenging, I left the job in the second year. Therefore, I would say that if students can balance their time on working and studying, the transaction costs of doing part-time job are low; but if they cannot balance the time, transaction costs are much higher.

  2. Let me make a general point before commenting on the post itself. You chose to write about your friend rather than about yourself. I'm not sure why. If it was because you are uncomfortable writing about yourself in public, even with the alias, then know that you can blog in Moodle instead. Though what you wrote is interesting, I really would prefer in the future for you to write about your own situation, because you will have internalized the thinking and will understand your own motivation in a much deeper way than you possibly could for others.

    It is particularly challenging for first generation students to go to college. They face obstacles that other students do not experience. I mentored one such student a couple of years ago. He had legitimate concerns about his family that i really couldn't help him with, because I had not relevant experience to bring to the discussion.

    I would be hard pressed to use the expression "transaction costs" when dealing with one's parents. Indeed, inside the family a good child tries to honor the parents as its own motivation. That sort of motivation doesn't exist outside the family. There may be tension from time to time between honoring one's parents and being responsible for your own well being. I struggled in my teen years with that. But I think of it separately form the economic issues we're trying to get at.