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The B.E. Journal of Theoretical Economics

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Transaction Costs and Institutions: Investments in Exchange

Charles Nolan / Alex Trew
  • Corresponding author
  • School of Economics and Finance, University of St. Andrews: Castlecliffe, The Scores, St. Andrews, Fife KY16 9AL, Scotland, UK
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Published Online: 2015-05-05 | DOI: https://doi.org/10.1515/bejte-2013-0090


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 adverse 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.

Keywords: exchange costs; transaction costs; general equilibrium; institutions

JEL: D02; D51; H20; L14


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About the article

Published Online: 2015-05-05

Published in Print: 2015-07-01

Citation Information: The B.E. Journal of Theoretical Economics, Volume 15, Issue 2, Pages 391–432, ISSN (Online) 1935-1704, ISSN (Print) 2194-6124, DOI: https://doi.org/10.1515/bejte-2013-0090.

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