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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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Bibliographic Info

Paper provided by Centre for Dynamic Macroeconomic Analysis in its series CDMA Working Paper Series with number 1103.

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Date of creation: 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. V. Filipe MARTINS-DA-ROCHA & YIANNIS VAILAKIS, 2008. "Endogenous Transaction Costs," Discussion Papers 0810, Exeter University, Department of Economics.
  2. Andrei A. Levchenko, 2007. "Institutional Quality and International Trade," Review of Economic Studies, Oxford University Press, vol. 74(3), pages 791-819.
  3. Pol Antràs & Esteban Rossi-Hansberg, 2008. "Organizations and Trade," NBER Working Papers 14262, National Bureau of Economic Research, Inc.
  4. Greenwood, Jeremy & Jovanovic, Boyan, 1990. "Financial Development, Growth, and the Distribution of Income," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages 1076-1107, October.
  5. V. Martins-da-Rocha & Yiannis Vailakis, 2010. "Financial markets with endogenous transaction costs," Economic Theory, Springer, vol. 45(1), pages 65-97, October.
  6. Williamson, Oliver E., 2009. "Transaction Cost Economics: The Natural Progression," Nobel Prize in Economics documents 2009-3, Nobel Prize Committee.
  7. Townsend, Robert M, 1978. "Intermediation with Costly Bilateral Exchange," Review of Economic Studies, Wiley Blackwell, vol. 45(3), pages 417-25, October.
  8. repec:bla:restud:v:74:y:2007:i:3:p:791-819 is not listed on IDEAS
  9. Coase, Ronald H., 1991. "The Institutional Structure of Production," Nobel Prize in Economics documents 1991-1, Nobel Prize Committee.
  10. Acemoglu, Daron & Antras, Pol & Helpman, Elhanan, 2007. "Contracts and Technology Adoption," Scholarly Articles 3199063, Harvard University Department of Economics.
  11. Daron Acemoglu & Simon Johnson, 2003. "Unbundling Institutions," NBER Working Papers 9934, National Bureau of Economic Research, Inc.
  12. repec:bla:restud:v:73:y:2006:i:1:p:251-293 is not listed on IDEAS
  13. Robert M. Townsend & Kenichi Ueda, 2003. "Financial Deepening, Inequality, and Growth: A Model-Based Quantitative Evaluation," IMF Working Papers 03/193, International Monetary Fund.
  14. Wittman, Donald, 1989. "Why Democracies Produce Efficient Results," Journal of Political Economy, University of Chicago Press, vol. 97(6), pages 1395-1424, December.
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Cited by:
  1. Alex William Trew, 2009. " Contracting Institutions and Development," CDMA Working Paper Series 0904, Centre for Dynamic Macroeconomic Analysis, revised 18 Oct 2010.

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