Transaction Costs Research Articles

Sorting versus screening in decentralized markets with adverse selection

We study the role of traders' meeting capacities in decentralized markets with adverse selection. Uninformed principals choose trading mechanisms to find an agent with whom to trade. Agents are privately informed about their quality and aim to match with one of the principals. We consider a rich set of meeting technologies and characterize the properties of the equilibrium allocations for each of them. In equilibrium, different agent types can be separated either via sorting—they self-select into different submarkets—or screening within the trading mechanism, or a combination of the two. We show that, as the meeting capacity increases, the equilibrium features more screening and less sorting. Interestingly, this increases price variability and reduces the average quality of trade as well as the total level of trade in the economy. The trading losses are, however, more than compensated by savings in entry costs so that welfare increases.

The distinctiveness effect: How cross-country dissimilarities influence governance decisions

Transaction cost theory is one of the most commonly used theories to explain how firms govern their economic activities. In the context of cross-border collaborations, transaction cost theory proposes that dissimilarities between the partners’ home countries, which constitute a key source of behavioral uncertainty, affect how collaborations are governed (i.e. whether firms opt for equity joint ventures or non-equity alliances). Although many firms are likely to face more than one dimension of dissimilarity—for example, in terms language and religion, as well as culture—studies in transaction cost theory typically focus on how each source of dissimilarity impacts governance choices independently, in isolation. We integrate insights from research on decision-making and social psychology into the logic of transaction cost theory to theorize about how multiple dimensions of dissimilarity interactively impact governance choices in collaborative agreements, such that the influence of a given level of dissimilarity is not independent of the level of dissimilarity in other dimensions. Specifically, we propose that the impact of dissimilarity on a given dimension on these governance choices will be lower, that is, negatively moderated, when dissimilarities on other dimensions are higher. For example, a given level of cultural distance will have a greater impact on governance choice when linguistic distance is low (because cultural distance becomes more distinctive) as compared to a case when linguistic distance is not low. Our analysis of 21,951 cross-border non-equity alliances and equity joint ventures yields support for our predictions.

Bridging the Digital Divide in Online Retailing: The Effect of a Strategic Focus on E-Commerce Fulfillment Offerings

The digital divide is an area of significant concern as society increases its reliance on the internet for everyday tasks. Retail operations are no exception to this trend where the use of the online sales channel has become ubiquitous. As retailers seek to provide a high-quality customer experience across socioeconomic groups to maximize sales potential, they must find ways to bridge the digital divide and ensure consumer access to their products. Embracing resources and appropriation theory and the consumer transaction cost perspective, we hypothesize on the efficacy of strategically focusing on omnichannel fulfillment offerings and online fulfillment offerings as operational tools retailers can employ to expand access to their products and improve sales to the diverse populations affected by the digital divide. We contribute to the digital divide research in operations management by showing that a strategic focus on e-commerce fulfillment capabilities is associated with a reduction in the negative impact of the digital divide. We further disaggregate the digital divide into its two component parts, infrastructure deficiencies and socioeconomic factors, to delve into the nuances of the hypothesized relationships. The findings indicate that e-commerce fulfillment strategies are broadly effective at ameliorating the negative effects of infrastructural elements of the digital divide while overcoming the socioeconomic-related component of the digital divide is more nuanced. To further understand the complexities of the socioeconomic element of the digital divide, we disaggregate the measure and explore the impact of an emphasis on omnichannel and online fulfillment offerings to help alleviate the impact of the digital divide for the following vulnerable consumer populations: those who are in poverty, those who are over 25 and have less than a high school education, those 65 and older, and individuals with a disability. Our results show that while these vulnerable populations can be aided by carefully selecting which omni or online fulfillment offerings are available to consumers, not all fulfillment offerings are effective.

Assessing regulatory governance for the water and sanitation Agencies in Brazil

This paper focuses on evaluating and benchmarking the governance of regulatory agencies in Brazil's water and sanitation sector. Using a unique database obtained through the application of a questionnaire, we developed an index of regulatory governance and ranked all the agencies in Brazil that participated in the study. The index is an aggregate number of the evaluation of four key governance characteristics: Autonomy, Transparency, Accountability, and Tools & Capacity, including not only formal aspects of regulation but also indicators related to actual implementation. Based on 18 different indices, we analyze the positions of agencies with regard to different aspects of their regulatory governance, considering not only performance in each variable but also scores in the different components of each category. This evaluation identifies particular agency shortcomings regarding governance and indicates needed improvements. Although Brazil has strived to consolidate the governance design of its regulatory agencies, implementing the independent regulator model still faces several challenges. Various aspects of governance can be improved to pursue greater efficiency and quality in providing services, particularly in Accountability and Political Autonomy, where the country shows the largest number of regulatory agencies with the lowest scores. Conversely, almost half of the participating agencies show optimal scores in the Regulatory Autonomy aspect of governance. The results, for the most part, corroborate the institutional theory, in which the role of institutions is paramount for greater efficiency in providing public services, as it reduces information asymmetries and transaction costs and maximizes economic incentives.

Applying a transaction cost perspective to decode viking Scandinavia's earliest recorded value relation: insights from the forsa ring’s runic inscription

ABSTRACT This article reevaluates the inscription of the Viking-era Forsa Ring, which contains Scandinavia’s oldest extant legal codex. The inscription’s fine reads ‘uksa … auk aura tua’, previously translated as ‘ox … and two öre [silver]’ and interpreted as a payment of both ox and silver, suggesting cumbersome transactions. This study applies a transaction cost perspective and draws on economic, legal and etymological contexts to propose that the fine could be paid with either an ox or two öre silver, not mandatorily both. This reinterpretation positions the Forsa Ring as Scandinavia's earliest documented instance of a value relation. The value of an ox at two öre of silver corresponds to the valuation of an ox at 30 pence in Anglo-Saxon Laws during the same period.

Investment management approaches: A comprehensive review of equity trading simulators, methodological challenges, and future directions

This paper provides a comprehensive review of equity trading simulators, focusing on their performance in assuring pre-trade compliance and portfolio investment management. A systematic search was conducted that covered the period of January 2000 to May 2023 and used keywords related to equity trade simulators, portfolio management, pre-trade compliance, online trading, and artificial intelligence. Studies demonstrating the use of simulators and online platforms specific to portfolio investment management, written in English, and matching the specified query were included. Abstracts, commentaries, editorials, and studies unrelated to finance and investments were excluded. The data extraction process included data related to challenges in modern portfolio trading, online stock trading strategies, the utilization of deep learning, the features of equity trade simulators, and examples of equity trade simulators. A total of 32 studies were included in the systematic review and were approved for qualitative analysis. The challenges identified for portfolio trading included the subjective nature of the inputs, variations in the return distributions, the complexity of blending different investments, considerations of liquidity, trading illiquid securities, optimal portfolio execution, clustering and classification, the handling of special trading days, the real-time pricing of derivatives, and transaction cost models (TCMs). Portfolio optimization techniques have evolved to maximize portfolio returns and minimize risk through optimal asset allocation. Equity trade simulators have become vital tools for portfolio managers, enabling them to assess investment strategies, ensure pre-trade compliance, and mitigate risks. Through simulations, portfolio managers can test investment scenarios, identify potential hazards, and improve their decision-making process.

Manufacturing enterprises digital collaboration empowered by Industrial Internet Platform: A multi-agent stochastic evolutionary game

Digital transformation is a critical way to improve the resilience of the manufacturing industry chain. However, the current digitalization of manufacturing enterprises lacks upstream and downstream linkage. If the level of digitization of upstream and downstream enterprises differs significantly, it will increase transaction costs. Digital transformation with the help of industrial Internet platform has become a trend. For this reason, this study deeply explores the influence mechanism of digitalization collaboration of manufacturing enterprises under the empowerment of industrial Internet platform. This paper constructs a stochastic evolutionary game model with core manufacturing enterprise, supplier and local government as the main players. Consider stochastic differential equations to analyze the stability conditions of game subjects, and explore different incentive mechanisms on enterprise strategy. The results show that the data security of the platform and the network effect coefficients significantly affect the strategy selection results of the players. Additionally, the change of environmental noise affects the strategy evolution process of the subject, and the supplier strategy is more affected by environmental noise compared to the core manufacturing enterprises. Furthermore, the dynamic incentive effect of the government is better than the static incentive, which can better promote the digital collaboration of manufacturing enterprises. Dynamic penalties are less effective than static penalties. The study’s conclusions can provide a reference for the government to implement the gradient digitalization incentive policy and provide a theoretical basis for promoting digital collaboration in manufacturing enterprises.

Can internet development improve carbon emission efficiency for manufacturing? The role of market integration

Improving carbon emission efficiency of manufacturing is important for promoting low-carbon development and achieving harmonious coexistence between humans and nature. In this study, we use the Global-MinDS model to measure the carbon emission efficiency of China's provincial manufacturing from 2011 to 2020. To do so, we construct a mathematical model to analyze the mechanism of the interaction among internet development, market integration, and carbon emission efficiency of manufacturing. Then, we empirically examine the carbon emission reduction effect of internet development using the Bartik instrument variable method and verify the significance of market integration. Our results show that internet development can significantly improve the carbon emission efficiency of manufacturing, promoting manufacturing low-carbon transformation. Carbon emission reduction effect of internet development is characterized by heterogeneity in market integration, environmental regulation, and policy intensity. This means that the impact of internet development is more pronounced in lower integration regions, higher environmental regulation intensity and in big data comprehensive experimental zone. Intermediate mechanism tests show that internet development can promote market integration by reducing external transaction costs, so as to play a carbon emission reduction effect in the market mechanism. Our study provides empirical evidence for the carbon emission reduction effect of the digital economy and offers valuable references for effectively promoting the low-carbon transformation of manufacturing in China from the perspective of unified market.

Problems and Countermeasures of Industrial Land Transformation from the Perspective of Transaction Costs

Problems and Countermeasures of Industrial Land Transformation from the Perspective of Transaction Costs

Does regional culture of integrity impact corporate total factor productivity? Evidence from China

AbstractThis study examined Chinese A‐share listed companies in Shanghai and Shenzhen from 2016 to 2020 to explore the relationship between regional culture of integrity (COI) and enterprise total factor productivity (TFP) and the internal mechanism of regional COI on TFP. The findings showed that regional COI is conducive to promotion of TFP. The mechanism test revealed that optimizing the business environment, promoting corporate technological innovation, and reducing transaction costs are three essential mechanisms. Further, the results indicated that the enhancement effect of regional COI on TFP is more significant in non‐SOEs and enterprises with high financing constraints.

How host-country firms’ information transparency affects MNEs’ joint venture entry mode of OFDI: evidence from Chinese listed manufacturing firms

Purpose Information transparency is an important factor in enhancing trust and promoting interfirm cooperation. By combining transaction cost theory and institutional theory, this study aims to examines whether host-country firms’ information transparency prompt multinational enterprises’ (MNEs) to choose the joint venture entry mode for outward foreign direct investment (OFDI). Design/methodology/approach Using Heckman two-stage estimation method, this study examines Chinese listed manufacturing firms for the period 2014–2019. Findings The findings indicate that the higher the information transparency of host-country firms, the higher the possibility of MNEs choosing the joint venture entry mode for OFDI. This study further finds that the positive relationship between host country firms’ information transparency and the possibility of choosing the joint venture entry mode is enhanced by institutional distance, but weakened by MNEs’ host-country experience. Originality/value How to choose the appropriate entry mode of OFDI in the internationalization strategy is an important issue for MNEs to consider. As the postpandemic world is characterized by increased global risks, decoupling of economies, disruption of global value chains and the retreat of globalization (Contractor and Cantwell, 2022), how to further strengthen cooperation, reduce the cost and risk of MNEs and truly realize common construction and sharing is one of the hot issues in both practice and research.

Contentious public finance: how entanglement shapes the costs of resisting elitist budgetary preferences

Entangled political economy views societal phenomena as featuring substantial interaction between economic and political entities, but questions have been raised about the conceptual properties of entanglement. The political economist Randall Holcombe has raised questions concerning the economic influences affecting uneven patterns of entanglement between entities. Drawing upon his own transaction costs-based framework of political stratification, Holcombe suggests that political elites incur relatively low transaction costs associated with bargaining over policies, whereas non-elites incur relatively high costs. This suggests that elites actively participate in policy design and implementation and can outmaneuver the non-elite public to externalize the costs of political decisions, yielding noticeable clustering effects within entangled network structures. This article seeks to build upon Holcombe’s insights, as well as the transaction cost politics of Charlotte Twight, illustrating how groups engaging in political processes attempt to manipulate transaction costs to secure favorable outcomes. Transaction cost manipulation by elites to secure advantages is commonly studied, but less so is how non-elitists succeed in adjusting the transaction costs of political exchanges to help prevent fiscal exploitation by elitists. The public finance case of Colorado’s Taxpayer’s Bill of Rights is used to illustrate how dynamic entanglements between elites and non-elites delivered institutional change better aligning with non-elite fiscal preferences.

On the issues of business negotiation processes and prospects for overcoming them through large language models

This article investigates the potential of large language models in overcoming problems within the business negotiation process. Typical issues encountered in business negotiations at various communication stages, which highlight the necessity for systematic resolution (such as breaches of good faith principles, ineffective communication strategies, lack of clear planning, etc.), are identified. The study focuses on a key negotiation problem related to the increasing transaction costs of businesses due to unmet interaction results. It demonstrates how large language models can optimize the negotiation process at every stage: from preparation (gathering and analysing information, scenario modelling) to conducting negotiations (contextual analysis, proposal formulation) and implementing agreements (execution control, monitoring). The study highlights that large language models can ensure: objectivity and speed in information processing; improved planning and forecasting; enhanced communication efficiency; and reduced transaction costs. The findings of the research conclude that the application of large language models is a promising development direction for optimizing the business negotiation process, contributing to the reduction of transaction costs and strengthening companies’ competitiveness by expanding human capabilities in managing business communications.

Intervention Options for Enhancing Smallholder Compliance with Regulatory and Market Standards for High-Value Fruits and Vegetables in Rwanda and Zambia

Agriculture is vital for economic growth in sub-Saharan Africa. In Rwanda and Zambia, the sector drives economic output, particularly the horticulture sector, which has emerged as a significant contributor to export revenue and employment for resource-poor rural communities. As agri-food value chains become globally connected, there are increasing concerns about food safety and both the social and environmental sustainability benefits of production, which has underscored the need for producers to comply with certain regulatory standards. This paper uses a value chain analysis approach to assess the factors influencing compliance among smallholder fresh fruit and vegetable (FFV) producers in Zambia and Rwanda, and identify practices essential for achieving widespread compliance, to enhance the competitiveness of the sector. The data were gathered from 340 FFV farmers and key informants using structured questionnaires. The results reveal that the value chains for target FFVs are still traditional, predominantly targeting local markets. These markets pose low barriers to entry for smallholders, and often with few safety and quality requirements. As such, there remains a paucity of understanding of market needs and regarding quality and safety standards amongst smallholders, which, coupled with low-input, low-technology farming methods, and inadequate pre- and post-harvest handling, limit the market potential. To bridge these gaps, this study recommends organising farmers into legally recognised entities, to enable access to compliance information, reduce transaction costs, and provide access to high-quality niche markets through public–private partnerships. Countries also need to develop industry codes of practice and quality management systems and support farmers to adhere to them.

Modeling and Empirical Analysis of Option Pricing with Transaction Costs: A Sub-Mixed Fractional Brownian Motion Approach

Modeling and Empirical Analysis of Option Pricing with Transaction Costs: A Sub-Mixed Fractional Brownian Motion Approach

The potential of artificial intelligence in business

The article examines the potential of artificial intelligence in entrepreneurial activity in the Russian economy at the present stage of its development in the context of modern challenges. The authors identified Russia’s place in global trends related to artificial intelligence. The authors paid attention to such relatively little–studied aspects of the use of artificial intelligence as the modernization of business processes in all sectors of the economy; improving the labor market through new forms of employment; optimization of migration policy; increasing the efficiency of the institution of self–employment in general and in terms of pension provision for the self–employed in particular; optimization of the size of the «shadow economy»; improvement of entrepreneurial activity through more complete implementation of the functions of an entrepreneur. The authors have identified the high positive potential of artificial intelligence in solving a number of problems in the Russian economy, including: reducing the size of the shadow economy, optimizing the labor market and migration policy, improving business processes and a number of others.The article shows that reducing transaction and transformation costs with the help of artificial intelligence will increase the growth rate of the Russian economy, increase the level of well–being of citizens and fully realize the functions of an entrepreneur in a market economy.

The contribution of digitization to successful international expansion: lessons from Decathlon’s strategic movements

Purpose The purpose of this paper is to explain to what extent digitization is an opportunity to international development of the firm by drawing on the international expansion of the French Decathlon group. The retailer and manufacturer have adopted a number of interesting strategies, following “specific movements,” as the authors have noted. Design/methodology/approach Data were collected using the Europress database. The authors compiled press articles about the development of the Decathlon company and discussed the various stages of the brand's growth to enhance understanding and propose refinements to the current knowledge of companies' internationalization. Findings The findings support the idea that digitization of the distribution and production chain reduces transaction costs and accelerates the conquest of market share. Digitization brings new experiential knowledge to companies and facilitates internationalization. Decathlon's success lies not in its resources or in the art of managing its internal capabilities, but rather in the ability to combine organizational resources with key external capabilities (development of technological partnerships). Originality/value The originality of this research lies in the logic of deepening the steps of companies’ internationalization integrating new technologies that shift current comprehension of this phenomenon. After the COVID-19 period, digitization is accelerated and represent threats and probably opportunities to break down barriers to companies’ abroad expansion.

Impacts of blockchain technology in agrifood: exploring the interplay between transactions and firms’ strategic resources

PurposeDespite the growing interest in blockchain technology (BCT) applications in the agri-food industry, evidence of their economic and strategic implications remains scarce. This study aims to contribute to filling this gap by jointly investigating how BCT adoption affects transactional relationships, and how it contributes to the firm’s strategic resources.Design/methodology/approachAn explanatory case study is conducted based on a theoretical framework grounded on transaction cost economics and the resource-based-dynamic capabilities view. Six BCT implementations by agri-food firms are studied. Data were collected through semi-structured interviews and analysed using thematic analysis.FindingsFindings reveal that BCT benefits depend on how companies integrate technology across their supply chains. In fact, the results suggest that overall transaction efficiency within the supply chain is enhanced only for those firms prioritising stakeholder engagement during technology implementation and leveraging existing trust relationships with economic agents. Moreover, the results suggest that BCT is not yet perceived as a strategic resource, but rather that it has the potential to enhance firms’ operational-adaptive, absorptive and innovative capabilities. When all supply chain actors clearly understand blockchain’s functionality and value, the development of these capabilities becomes more pronounced.Practical implicationsThe study identifies two BCT adoption configurations. One primarily focuses on enhancing supply chain efficiency and transparency (dynamic BCT), while the other uses BCT mainly for marketing purposes (static BCT). These configurations lead to varied possibilities for leveraging BCT’s potential advantages. Furthermore, they show how a mismatch between a strategic approach and its chosen configuration could work against any positive impact and lead to disillusionment with the BCT. Thus, managers should assess carefully the impact of such different configuration choices on performance.Originality/valueTo the best of the authors’ knowledge, this is the first study to attempt to analyse the economic implications of adopting BCT in the food sector from both a firm and supply chain perspective. Additionally, it shows how interpreting these impacts is contingent on the diverse modalities for embedding BCT into existing supply chains.

Creating an Efficient Public–Private Partnership Bundle: An Empirical Study

Public–Private Partnerships have been implemented globally as a key procurement strategy for addressing the issue of funding gaps amidst the immense pressure to deliver new major infrastructure projects. However, in current practice, procurement selection is applied to the entire bundle of project activities. This often leads to unduly large bundles of externalized project activities that create unduly large PPP contracts and attempt to transfer too much risk. To address this gap, this paper presents the development and testing of an implementable model that embodies a range of microeconomic theories—namely, transaction cost and resource-based theories—and property rights theory. This paper presents the first empirical testing of this model based on two road and two health projects, using competition as an independent measure of the validity of the recommended procurement strategy. The results provide compelling evidence that a rigorous application of the model will enable a substantial improvement of existing procurement approaches, such as identifying the most suitable bundle to be procured using a PPP approach.

Goods market desirability of minimum wages

AbstractThis paper presents a general equilibrium model incorporating heterogeneous firms and a perfectly competitive labour market to explore the desirability of minimum wages. We demonstrate that a low minimum wage could enhance social welfare, assuming equal weighting for all individuals. This occurs because the introduction of minimum wages has the potential to mitigate the goods market distortions arising from imperfect competition, firm heterogeneity and free entry. Additionally, we illustrate that the optimal minimum wage is positively associated with the preference intensity for differentiated products relative to the numeraire and population size, while it negatively correlates with the degree of love for variety, entry cost, and upper bound of marginal labour requirements.