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Institutions, Contracts and Organizations

Institutions, Contracts and Organizations

Perspectives from New Institutional Economics

Edited by Claude Ménard

This outstanding book presents new original contributions from some of the world’s leading economists including Ronald Coase, Douglass C. North, Masahiko Aoki, Oliver E. Williamson and Harold Demsetz. It demonstrates the extent and depth of the New Institutional Economics research programme which is having a worldwide impact on the economics profession.

Chapter 24: Measuring the costs of exchange

Alexandra Benham and Lee Benham

Subjects: economics and finance, industrial organisation, institutional economics


Alexandra Benham and Lee Benham* INTRODUCTION Transaction costs fundamentally affect the functioning of an economy. They affect what is produced and what exchanges take place in the market; they affect which organizations survive and which rules of the game persist. Specific assumptions concerning transaction costs underlie the majority of theoretical models in economics, whether classical, Keynesian, neo-Keynesian, or neoclassical. Models dealing with monopoly, vertical integration, externalities, strategic behavior, wage and price stickiness, and imperfect markets all require specific assumptions concerning these costs. Transaction costs are arguably the most important set of prices in an economy. Yet how big are they? How much do they vary across settings and over time? Few empirical estimates exist concerning their magnitude and variation. This chapter examines some conceptual and practical difficulties of estimating transaction costs empirically. We then consider a subset of the total costs incurred in a transaction, a subset which we designate the cost of exchange. The cost of exchange is defined as the opportunity cost faced by an individual using a given form of exchange to obtain a specified good within a given institutional setting. Some illustrative examples suggest an approach for estimating the costs of exchange empirically. ELEMENTS OF TRANSACTION COSTS In modeling and in policy discussions, economists must deal constantly with the implications of different levels of transaction costs. Economists’ theories of economic performance are based upon Adam Smith’s notion that wealth depends on specialization, which depends on the extent of trade, which depends...

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