Chapter 19: Transaction Cost Economics

Christopher Ross Bell

Transaction cost economics Economics is the study of human interactions involving trade. In addition to the costs of production and distribution, every trade has associated with it the costs of the trade itself: of locating trading partners, of negotiating the terms of the trade and adapting those terms as economic conditions change, of monitoring and enforcing the terms of the trade, and so forth. These costs are called transaction costs , and traders' attempts to limit them explain why many economic, political, and social institutions have evolved the way they have. Transaction cost economists seek to understand how transaction costs influence the design and evolution of the institutions used to coordinate economic relationships. Friedrich Hayek (1945) has written of the “marvel” of the spontaneous coordination of the market in a world of flux and change: It aggregates and makes efficient use of information no one person could ever know, it ...

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