This paper proposes a simple framework for understanding endogenous transaction costs ñtheir composition, size and implications. We distinguish between investments in institutions that facilitate exchange and the costs of conducting exchange itself. Institutional quality and market size are determined by the decisions of risk averse 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.
Original language | English |
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Number of pages | 42 |
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Publication status | Published - Jun 2015 |
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