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Transaction costs, information technology and development

  • Nirvikar Singh

Purpose – The purpose of this paper is to examine the impact of transaction costs on economic welfare and development, and the role of information technology (IT) in reducing transaction costs. Design/methodology/approach – The paper extends the static model of Romer, in which transaction costs reduce welfare by reducing the equilibrium number of intermediate goods, and estimate the welfare losses in the case of domestic transaction costs. The main analysis of the paper extends a dynamic model of Ciccone and Matsuyama to incorporate transaction costs. Also described are case studies of the use of IT in rural India. Findings – In the static model, it is shown that domestic transaction costs have a substantial welfare impact when the number of goods is endogenous. In the dynamic model, it is shown that high transaction costs reduce the long-run level of development, and may arrest development completely in the extreme case. Some preliminary, qualitative evidence from rural India is offered to illustrate how these reductions may occur through the use of IT. Originality/value – The treatment of transaction costs in a dynamic model is novel, and the use of such a model provides a new theoretical underpinning for understanding the potential impacts of IT on development.

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Article provided by Emerald Group Publishing in its journal Indian Growth and Development Review.

Volume (Year): 1 (2008)
Issue (Month): 2 (December)
Pages: 212-236

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Handle: RePEc:eme:igdrpp:v:1:y:2008:i:2:p:212-236
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  1. John Whalley, 2005. "Globalization and Values," CESifo Working Paper Series 1441, CESifo Group Munich.
  2. Kevin J. Stiroh, 2002. "Information Technology and the U.S. Productivity Revival: What Do the Industry Data Say?," American Economic Review, American Economic Association, vol. 92(5), pages 1559-1576, December.
  3. Antonio Ciccone & Kiminori Matsuyama, 1995. "Start-up costs and pecuniary externalities as barriers to economic development," Economics Working Papers 142, Department of Economics and Business, Universitat Pompeu Fabra.
  4. Dale W. Jorgenson, 2007. "Information Technology and the G7 Economies," NBER Chapters, in: Hard-to-Measure Goods and Services: Essays in Honor of Zvi Griliches, pages 325-350 National Bureau of Economic Research, Inc.
  5. Paul M. Romer, 1993. "New Goods, Old Theory, and the Welfare Costs of Trade Restrictions," NBER Working Papers 4452, National Bureau of Economic Research, Inc.
  6. Timothy J. Kehoe & Kim J. Ruhl, 2006. "How Important is the New Goods Margin in International Trade?," 2006 Meeting Papers 733, Society for Economic Dynamics.
  7. Foley, Duncan K., 1970. "Economic equilibrium with costly marketing," Journal of Economic Theory, Elsevier, vol. 2(3), pages 276-291, September.
  8. Singh, Nirvikar, 2004. "Information Technology and Rural Development in India," Santa Cruz Center for International Economics, Working Paper Series qt9wj6d6kv, Center for International Economics, UC Santa Cruz.
  9. Hahn, F H, 1971. "Equilibrium with Transaction Costs," Econometrica, Econometric Society, vol. 39(3), pages 417-39, May.
  10. Robert J. Barro, 2001. "Human Capital and Growth," American Economic Review, American Economic Association, vol. 91(2), pages 12-17, May.
  11. Nirvikar Singh, 2003. "India's Information Technology Sector: What Contribution to Broader Economic Development?," OECD Development Centre Working Papers 207, OECD Publishing.
  12. Martin L. Weitzman, 1998. "Recombinant Growth," The Quarterly Journal of Economics, MIT Press, vol. 113(2), pages 331-360, May.
  13. Ralf Ruhwedel & Michael Funke, 2004. "Trade, Product Variety and Welfare: A Quantitative Assessment for the Transition Economies in Central and Eastern Europe," Quantitative Macroeconomics Working Papers 20401, Hamburg University, Department of Economics.
  14. Kaushik, P. D. & Singh, Nirvikar, 2004. "Information Technology and Broad-Based Development: Preliminary Lessons from North India," World Development, Elsevier, vol. 32(4), pages 591-607, April.
  15. David Hummels & Peter J. Klenow, 2002. "The Variety and Quality of a Nation's Trade," NBER Working Papers 8712, National Bureau of Economic Research, Inc.
  16. Francesco Daveri, 2003. "Information Technology and Productivity Growth Across Countries and Sectors," Working Papers 227, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  17. Nirvikar Singh, 2004. "Information Technology as an Engine of Broad-Based Growth in India," Development and Comp Systems 0412012, EconWPA.
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