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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. Townsend, Robert M, 1978. "Intermediation with Costly Bilateral Exchange," Review of Economic Studies, Wiley Blackwell, vol. 45(3), pages 417-25, October.
  2. Daron Acemoglu & Pol Antràs & Elhanan Helpman, 2007. "Contracts and Technology Adoption," American Economic Review, American Economic Association, vol. 97(3), pages 916-943, June.
  3. Pol Antràs & Esteban Rossi-Hansberg, 2009. "Organizations and Trade," Annual Review of Economics, Annual Reviews, vol. 1(1), pages 43-64, 05.
  4. Coase, R H, 1992. "The Institutional Structure of Production," American Economic Review, American Economic Association, vol. 82(4), pages 713-19, September.
  5. Daron Acemoglu & Simon Johnson, 2005. "Unbundling Institutions," Journal of Political Economy, University of Chicago Press, vol. 113(5), pages 949-995, October.
  6. Robert M. Townsend & Kenichi Ueda, 2003. "Financial Deepening, Inequality, and Growth," IMF Working Papers 03/193, International Monetary Fund.
  7. Williamson, Oliver E., 2009. "Transaction Cost Economics: The Natural Progression," Nobel Prize in Economics documents 2009-3, Nobel Prize Committee.
  8. V. Martins-da-Rocha & Yiannis Vailakis, 2010. "Financial markets with endogenous transaction costs," Economic Theory, Springer, vol. 45(1), pages 65-97, October.
  9. Martins-da-Rocha, Victor Filipe & Vailakis, Yiannis, 2008. "Endogenous Transaction Costs," Economics Working Papers (Ensaios Economicos da EPGE) 680, FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).
  10. Andrei A. Levchenko, 2004. "Institutional Quality and International Trade," IMF Working Papers 04/231, International Monetary Fund.
  11. Wittman, Donald, 1989. "Why Democracies Produce Efficient Results," Journal of Political Economy, University of Chicago Press, vol. 97(6), pages 1395-1424, December.
  12. 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).
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Cited by:
  1. Alex Trew, 2009. "Contracting Institutions and Development," CDMA Working Paper Series 200904, Centre for Dynamic Macroeconomic Analysis, revised 18 Oct 2010.

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