Integrating Transaction Costs, Appropriability, and Consumption Frictions into Neoclassical Growth Dynamics

This paper develops a governance-augmented Ramsey-Cass-Koopmans (RCK) growth model that unifies the neoclassical theory of capital accumulation with the institutional economics of Coase, Williamson, Alchian-Demsetz, Barzel, North, and Grossman-Hart-Moore. The central proposition is that governance is production: institutions reshape the effective production frontier, alter the intertemporal Euler condition, and modify welfare. On the production side, relation-specific investment generates incentive relief when returns are appropriable, offset by bureaucratic drag, safeguarding costs, and maladaptation. On the consumption side, transaction frictions such as iceberg costs, convex distribution costs, shopping-time requirements, and psychological wedges reduce effective utility. The model demonstrates that governance frictions shift steady states, generate multiple equilibria, and create low-level development traps. Comparative statics show that strengthening property rights, reducing bureaucracy, and lowering consumer frictions raise capital, consumption, and welfare. Cross-country differences in governance parameters explain divergent growth paths, while endogenizing institutions yields virtuous cycles, vicious cycles, and path dependence. The framework integrates institutional economics into dynamic macroeconomics, providing a rigorous foundation for understanding how governance structures shape long-run development.