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Transaction Costs and Institutions: Investments in Exchange

  • Charles Nolan
  • Alex Trew

This paper proposes a simple model for understanding transaction costs – their composition, size and policy implications. We distinguish between investments in institutions that facilitate exchange and the cost 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/repecfiles/2/1103.pdf
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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
Date of revision: 20 Mar 2015
Handle: RePEc:san:cdmawp:1103
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  1. Coase Ronald, 1991. "The Institutional Structure of Production," Journal des Economistes et des Etudes Humaines, De Gruyter, vol. 2(4), pages 10, December.
  2. V. Martins-da-Rocha & Yiannis Vailakis, 2010. "Financial markets with endogenous transaction costs," Economic Theory, Springer, vol. 45(1), pages 65-97, October.
  3. Jeremy Greenwood & Boyan Jovanovic, 1989. "Financial Development, Growth, and the Distribution of Income," NBER Working Papers 3189, National Bureau of Economic Research, Inc.
  4. Antràs, Pol & Rossi-Hansberg, Esteban, 2008. "Organizations and Trade," CEPR Discussion Papers 6965, C.E.P.R. Discussion Papers.
  5. Daron Acemoglu & Pol Antràs & Elhanan Helpman, 2007. "Contracts and Technology Adoption," American Economic Review, American Economic Association, vol. 97(3), pages 916-943, June.
  6. repec:oup:restud:v:73:y:2006:i:1:p:251-293 is not listed on IDEAS
  7. repec:oup:restud:v:74:y:2007:i:3:p:791-819 is not listed on IDEAS
  8. Williamson, Oliver E., 2009. "Transaction Cost Economics: The Natural Progression," Nobel Prize in Economics documents 2009-3, Nobel Prize Committee.
  9. Robert M. Townsend & Kenichi Ueda, 2003. "Financial Deepening, Inequality, and Growth: A Model-Based Quantitative Evaluation," IMF Working Papers 03/193, International Monetary Fund.
  10. George Chobanov & Henrik Egbert, 2007. "The Rise of the Transaction Sector in the Bulgarian Economy," Comparative Economic Studies, Palgrave Macmillan, vol. 49(4), pages 683-698, December.
  11. Andrei A. Levchenko, 2004. "Institutional Quality and International Trade," IMF Working Papers 04/231, International Monetary Fund.
  12. Robert M. Townsend, 1978. "Intermediation with Costly Bilateral Exchange," Review of Economic Studies, Oxford University Press, vol. 45(3), pages 417-425.
  13. Daron Acemoglu & Simon Johnson, 2003. "Unbundling Institutions," NBER Working Papers 9934, National Bureau of Economic Research, Inc.
  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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