We suggest an operational definition of transaction cost as the expected value of strategy information in games played by individuals randomly matched from a large population. We relate the concept of a transaction cost minimum to those of Nash equilibrium, efficiency, and evolutionary stability, and apply it in a simple model of the Coasean firm. In particular, we identify circumstances in which evolutionary dynamics will minimize transaction cost, which allows various informal hypotheses about the relation between institutional evolution and transaction cost to be addressed in a precise sense.
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Length: 22 pages Date of creation: Apr 1994 Date of revision: Publication status: Published in Journal of Economic Behavior and Organization, 1994, pages 219-239 Handle: RePEc:hhs:hastef:0013
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Find related papers by JEL classification: C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
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