Evidence of the negative relationship between transaction costs and economic performance in G7+BRICS countries

Abstract

The object of this research is the relationship between Transaction Costs and economic performance. Weak or unreliable institutions open space for corruption, generating a negative externality, increasing the economy's Transaction Costs, inhibiting doing business, and reducing economic growth. Although there is a broad debate about the negative relationship between Transaction Costs and economic performance, little is known about this relationship's strength and significance. This gap occurs because most Transaction Costs estimates are performed at the microeconomic level. Besides, the few estimates of countries' Transaction Costs at the national level are from different periods, which make any analysis unfeasible. The objective of this research is twofold. First, to introduce a comparative index of the Transaction Costs of the countries. Second, to analyze the relationship between the Transaction Costs Index and economic performance. The robustness analysis reveals that the Transaction Costs Index is reliable because the countries' average variation in the ranking is relatively low (1.5 positions), serving as an alternative to the Transaction Costs estimates. The research results show a significant (p-value=0.0054), strong, and negative (R=–0.746) correlation between the Transaction Costs Index and the Gross National Income per capita of G7+BRICS countries. BRICS countries and Italy have lower economic performance, and higher scores on the Transaction Costs Index, suggesting that these countries' institutions are more inefficient than other G7 countries. These results reinforce the current understanding of the negative relationship between Transaction Costs and countries' economic performance. Understanding the effects of Transaction Costs on business activity and, consequently, on economic performance is extremely important for governments to promote adjustments in the regulatory environment that encourage business activity.