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Transaction costs, trust, and the structuring of markets

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  • Robertson, Paul

    ()
    (School of Economics and Finance, University of Tasmania)

Abstract

This paper examines the institutional arrangements that develop when the risks of opportunism and other contributors to transaction costs are high but transactions are nevertheless necessary for economic efficiency. Williamson's famous distinction between markets and hierarchies is inadequate because under certain circumstances markets may be hierarchies that are deliberately managed to reduce levels of transaction costs and undertake strategic objectives to improve their competitiveness with other hierarchies, including other markets. As transaction costs are production costs for these markets, careful management increases the efficiency of the markets. As a result, some important markets are also hierarchies that are structured in ways that are analogous to firms precisely in order to reduce their costs of operation, including the transaction costs that arise from using them. This paper looks at the evolution of the membership rules of stock exchanges, a select but important group of markets that have been consciously constructed over long periods and with frequent modifications because of environmental change and learning by participants. Stock exchanges belong to a category that also includes insurance exchanges such as Lloyd's, and various markets involving shipping and world trade. These are markets in which the use of up-to-date information is especially important because conditions may alter quickly and in which risk, uncertainty, and the potential for opportunistic behaviour are factors that affect their operations in significant ways. Their productivity as markets is (or historically has been) so high that their replacement by hierarchies is virtually unthinkable because they allow for exchanges that could not otherwise be accomplished smoothly. As a result, when transaction and agency costs arise in such markets, responses have concentrated on finding mechanisms for reducing them to tolerable levels rather than on abandoning transactions altogether through the internalization of activities. The early sections of the paper are devoted to an examination of the logic of constructed markets, while the later sections examine how this logic worked out in the case of the London, New York and Sydney Stock Exchanges in the nineteenth and early twentieth centuries.

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File URL: http://eprints.utas.edu.au/1455/1/PR21.pdf
File Function: First version, 2007
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Bibliographic Info

Paper provided by University of Tasmania, School of Economics and Finance in its series Working Papers with number 1455.

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Length: 39 pages
Date of creation: Feb 2007
Date of revision: Feb 2007
Publication status: Published in Proceedings of the Asia-Pacific Economic and Business History Conference, Sydney 12-14 Feb 2007.
Handle: RePEc:tas:wpaper:1455

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Postal: Private Bag 85, Hobart, Tasmania 7001
Phone: +61 3 6226 7672
Fax: +61 3 6226 7587
Web page: http://www.utas.edu.au/economics-finance/
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Keywords: Transaction costs; markets; hierarchies; stock exchange; constructed markets;

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  1. Paul L. Robertson & Lee J. Alston, 1992. "Technological choice and the organization of work in capitalist firms," Economic History Review, Economic History Society, vol. 45(2), pages 330-349, 05.
  2. Richard N. Langlois, 2005. "The Secret Life of Mundane Transaction Costs," Working papers 2005-49, University of Connecticut, Department of Economics.
  3. Coase, R H, 1988. "The Nature of the Firm: Origin," Journal of Law, Economics and Organization, Oxford University Press, vol. 4(1), pages 3-17, Spring.
  4. Coase, R H, 1988. "The Nature of the Firm: Influence," Journal of Law, Economics and Organization, Oxford University Press, vol. 4(1), pages 33-47, Spring.
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