Perspectives from New Institutional Economics
Edited by Claude Ménard
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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