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Optimal design of trade institutions


Author Info

  • Robert Gilles


  • Dimitrios Diamantaras


  • Pieter Ruys



We model an economy with social institutions that facilitate trade and induce three types of costs: establishment costs, access costs, and use costs. Use costs are specific transaction costs related to the use of these trade institutions. We assume that a trade institution is economically completely determined by the costs it imposes and by the effects on the trades it facilitates. We extend the Pareto efficiency concept to include various modes of organization of social institutions: the costs and benefits of these organizations are expressed in the trades they facilitate. Within this setting we discuss a valuation equilibrium concept, in which all agents use a common conjectural price system that assigns to every trade institution the price vector that would prevail under it. This feature of the equilibrium is important in securing the second welfare theorem, and is new to the analysis of economies with costly trade. Since the use costs can be nonlinear, there are non-convexities that prevent the second welfare theorem from obtaining in a finite economy, but we show it for large economies. Copyright Springer-Verlag Berlin/Heidelberg 2003

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Bibliographic Info

Article provided by Springer in its journal Review Economic Design.

Volume (Year): 8 (2003)
Issue (Month): 3 (October)
Pages: 269-292

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Handle: RePEc:spr:reecde:v:8:y:2003:i:3:p:269-292

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Keywords: Institutional infrastructure; trade institutions; valuation equilibrium;


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Cited by:
  1. Robert P. Gilles & Emiliya Lazarova & Pieter H. M. Ruys, 2006. "On Socio-Economic Roles And Specialisation," Economic Papers, The Economic Society of Australia, vol. 25(2), pages 157-170, 06.
  2. Gilles, R.P. & Lazarova, E.A. & Ruys, P.H.M., 2008. "Stable Economic Cooperation: A Relational Approach," Discussion Paper, Tilburg University, Center for Economic Research 2008-25, Tilburg University, Center for Economic Research.
  3. Ruys, P.H.M., 2005. "The Governance of Services," Discussion Paper, Tilburg University, Center for Economic Research 2005-102, Tilburg University, Center for Economic Research.
  4. Gilles, R.P. & Lazarova, E.A. & Ruys, P.H.M., 2006. "Stability, Specialization and Social Recognition," Discussion Paper, Tilburg University, Center for Economic Research 2006-17, Tilburg University, Center for Economic Research.


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