CHAPTER 4 - TRANSACTION COSTS

Abstract

This chapter focuses on transaction costs. When two agents sign a contract specifying some time and location that particular commodities will be exchanged, a transaction takes place. The resources that are used in the design and enforcement of the contract are resources associated with the method of exchanging ownership rights and are called transaction costs. Transaction costs involve bringing agents together physically or by some communication system, acquiring and disseminating information about the terms of exchange, drawing legally binding contracts, and enforcement of such contracts. Transaction costs vary from society to society because of differences in the attitudes of individuals toward property. The sources of transaction cost are categorized as either negotiation or enforcement costs. Negotiation costs are the resources used in the process of arranging mutual satisfactory exchanges of property, while enforcement costs are resources used with the aim of preventing breach of contractual stipulations.