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Transaction Costs and Institutions

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  • Nolan, Charles
  • Trew, Alex

Abstract

This paper proposes a simple framework for understanding endogenous transaction costs - their composition, size and implications. In a model of diversification against risk, we distinguish between investments in institutions that facilitate exchange and the costs of conducting exchange itself. Institutional quality and market size are determined by the decisions of risk averse agents and conditions are discussed under which the efficient allocation may be decentralized. We highlight a number of differences with models where transaction costs are exogenous, including the implications for taxation and measurement issues.

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File URL: http://repo.sire.ac.uk/handle/10943/253
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Paper provided by Scottish Institute for Research in Economics (SIRE) in its series SIRE Discussion Papers with number 2011-11.

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Date of creation: 2011
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Handle: RePEc:edn:sirdps:253

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Keywords: Exchange costs; transaction costs; general equilibrium; institutions;

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  1. Pol Antràs & Esteban Rossi-Hansberg, 2008. "Organizations and Trade," NBER Working Papers 14262, National Bureau of Economic Research, Inc.
  2. Townsend, Robert M, 1978. "Intermediation with Costly Bilateral Exchange," Review of Economic Studies, Wiley Blackwell, vol. 45(3), pages 417-25, October.
  3. Greenwood, J. & Jovanovic, B., 1988. "Financial Development, Growth, And The Distribution Of Income," RCER Working Papers 131, University of Rochester - Center for Economic Research (RCER).
  4. Coase, Ronald H., 1991. "The Institutional Structure of Production," Nobel Prize in Economics documents 1991-1, Nobel Prize Committee.
  5. Oliver E. Williamson, 2010. "Transaction Cost Economics: The Natural Progression," American Economic Review, American Economic Association, vol. 100(3), pages 673-90, June.
  6. Daron Acemoglu & Simon Johnson, 2003. "Unbundling Institutions," NBER Working Papers 9934, National Bureau of Economic Research, Inc.
  7. Robert M. Townsend & Kenichi Ueda, 2003. "Financial Deepening, Inequality, and Growth," IMF Working Papers 03/193, International Monetary Fund.
  8. V. Filipe MARTINS-DA-ROCHA & YIANNIS VAILAKIS, 2008. "Endogenous Transaction Costs," Discussion Papers 0810, Exeter University, Department of Economics.
  9. Wittman, Donald, 1989. "Why Democracies Produce Efficient Results," Journal of Political Economy, University of Chicago Press, vol. 97(6), pages 1395-1424, December.
  10. V. Martins-da-Rocha & Yiannis Vailakis, 2010. "Financial markets with endogenous transaction costs," Economic Theory, Springer, vol. 45(1), pages 65-97, October.
  11. Andrei A. Levchenko, 2007. "Institutional Quality and International Trade," Review of Economic Studies, Oxford University Press, vol. 74(3), pages 791-819.
  12. Daron Acemoglu & Pol Antràs & Elhanan Helpman, 2007. "Contracts and Technology Adoption," American Economic Review, American Economic Association, vol. 97(3), pages 916-943, June.
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Cited by:
  1. Trew, Alex, 2010. "Contracting Institutions and Development," SIRE Discussion Papers 2010-86, Scottish Institute for Research in Economics (SIRE).

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