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Transaction Costs and Institutions

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  • Charles Nolan
  • Alex Trew

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://www.st-andrews.ac.uk/economics/CDMA/papers/wp1103.pdf
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Bibliographic Info

Paper provided by Centre for Dynamic Macroeconomic Analysis in its series CDMA Working Paper Series with number 201103.

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Date of creation: 15 Feb 2011
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Handle: RePEc:san:cdmawp:1103

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

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References

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  1. Andrei A. Levchenko, 2004. "Institutional Quality and International Trade," IMF Working Papers 04/231, International Monetary Fund.
  2. Pol Antràs & Esteban Rossi-Hansberg, 2008. "Organizations and Trade," NBER Working Papers 14262, National Bureau of Economic Research, Inc.
  3. Oliver E. Williamson, 2010. "Transaction Cost Economics: The Natural Progression," American Economic Review, American Economic Association, American Economic Association, vol. 100(3), pages 673-90, June.
  4. Robert M. Townsend & Kenichi Ueda, 2003. "Financial Deepening, Inequality, and Growth," IMF Working Papers 03/193, International Monetary Fund.
  5. Coase Ronald, 1991. "The Institutional Structure of Production," Journal des Economistes et des Etudes Humaines, De Gruyter, De Gruyter, vol. 2(4), pages 10, December.
  6. Daron Acemoglu & Pol Antràs & Elhanan Helpman, 2007. "Contracts and Technology Adoption," American Economic Review, American Economic Association, American Economic Association, vol. 97(3), pages 916-943, June.
  7. 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).
  8. Greenwood, J. & Jovanovic, B., 1990. "Financial Development, Growth, And The Distribution Of Income," University of Western Ontario, The Centre for the Study of International Economic Relations Working Papers 9002, University of Western Ontario, The Centre for the Study of International Economic Relations.
  9. Daron Acemoglu & Simon Johnson, 2005. "Unbundling Institutions," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 113(5), pages 949-995, October.
  10. V. Martins-da-Rocha & Yiannis Vailakis, 2010. "Financial markets with endogenous transaction costs," Economic Theory, Springer, Springer, vol. 45(1), pages 65-97, October.
  11. Townsend, Robert M, 1978. "Intermediation with Costly Bilateral Exchange," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 45(3), pages 417-25, October.
  12. Wittman, Donald, 1989. "Why Democracies Produce Efficient Results," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 97(6), pages 1395-1424, December.
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Cited by:
  1. Alex Trew, 2012. "Contracting Institutions and Development," Review of Economics and Institutions, Università di Perugia, Università di Perugia, vol. 3(3).

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