The Economics of Transaction Costs: Theory, Methods and Applications

211 Pages·2003·1.839 MB·English

by  P. K. Rao (auth.)

The Economics of Transaction Costs
Also by P. K. Rao
DEVELOPMENT FINANCE
ENVIRONMENTAL TRADE DISPUTES AND THE WTO
INTERNATIONAL ENVIRONMENTAL LAW AND ECONOMICS
SUSTAINABLE DEVELOPMENT: Economics and Policy
THE ECONOMICS OF GLOBAL CLIMATIC CHANGE
THE WORLD TRADE ORGANIZATION AND THE ENVIRONMENT
The Economics of

Transaction Costs

Theory, Methods and Applications

P. K. Rao
Director, Global Development Institute
New Jersey, USA
Q Krishna Rao Pinninti 2003
Softcover reprint of the hardcover 1st edition 2003 978-0-333-80268-7
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ISBN 978-1-349-4218 5-5 ISBN 978-0-230-59768-6 (eBook)
DOI 10.1057/9780230597686
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Library of Congress Cataloging-in-Publication Data
Rao, P. K.
The economics of transaction costs: theory, methods, and applications /
P. K. Rao.
p. cm.

Includes bibliographical references and index.

ISBN 978-1-349-421
85-5
1. Transaction costs. 2. Costs, Industrial. 3. Contracts±Economic aspects.
I. Title.
HB846.3 .R36 2002
338.50142±dc21 2002026952
10 9 8 7 6 5 4 3 2 1
12 11 10 09 08 07 06 05 04 03
To my parents
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Contents

Preface x

Glossary xii

Part I Theory and Methods
Introduction 3

1 Background 5

1.1 Introduction 5

1.2 Transaction costs: concepts and assumptions 6

1.3 Fixed costs, variable costs and transaction costs 16

1.4 Bounded rationality, uncertainty and irrationality 17

1.5 The comprehensive definition and framework 19

1.6 Conclusions 25

2 Elements of Industrial Organization 26

2.1 Introduction 26

2.2 Economics of the firm 27

2.3 Principal±agent theory 36

2.4 Technical innovation 37

2.5 Conclusions 38

3 Economic Externalities 41

3.1 Introduction 41

3.2 Externalities and transaction costs 42

3.3 Coasean proposition and neo-Coasean perspectives 45

3.4 Market failures and institutional inefficiencies 52

3.5 Network externalities 56

3.6 Conclusions 59

4 New Neoclassical Economics 60

4.1 Introduction 60

4.2 Marginality principles and economic optimality 61

4.3 Economic growth and development 67

vii
viii Contents
4.4 The economics of free trade 72

4.5 The economics of structural adjustment lending 76

4.6 Benefit±cost analysis 84

4.7 Conclusions 86

5 New Institutional Economics 88

5.1 Introduction 88

5.2 Concepts and approaches 89

5.3 Trust, co-operation and social capital 92

5.4 Expectations, reputation, credibility and commitments 94

5.5 Political economy and institutional efficiency 97

5.6 Contestable markets and governance 100

5.7 Regulations and rent seeking 101

5.8 Conclusions 103

Part II Applications
Introduction 107

6 Law and Economics 109

6.1 Introduction 109

6.2 Economics of litigation 110

6.3 Property rights and liability rules 115

6.4 Economics of contracts 117

6.5 Conclusions 127

7 Behavioural Economics 128

7.1 Introduction 128

7.2 Relative profit maximization 129

7.3 Habit formation and irrationality 130

7.4 Norms, customs and traditions 134

7.5 Economics of regulatory compliance 139

7.6 Conclusions 140

8 Organizations Theory 141

8.1 Introduction 141

8.2 Hierarchies and decentralization 142

8.3 The design of incentives 144

8.4 The design of organizations 145

8.5 Conclusions 151
Contents ix
9 Environmental Economics 152

9.1 Introduction 152

9.2 Markets and environmental regulation 153

9.3 Industrial emissions trading 156

9.4 Adaptation, sustainability and climate change 159

9.5 Environmental conflicts and mediation 166

9.6 Conclusions 169

10 Perspectives 170

10.1 New approaches and applications 170

10.2 Directions for research 173

References 176

Index 195