Scandinavian Working Papers in Economics

SSE/EFI Working Paper Series in Economics and Finance,
Stockholm School of Economics

No 13: Transaction Cost, Institutions, and Evolution

Karl Wärneryd ()
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Karl Wärneryd: Dept. of Economics, Stockholm School of Economics, Postal: Stockholm School of Economics, P.O. Box 6501, 113 83 Stockholm, Sweden

Abstract: We suggest an operational definition of transaction cost as the expected value of strategy information in games played by individuals randomly matched from a large population. We relate the concept of a transaction cost minimum to those of Nash equilibrium, efficiency, and evolutionary stability, and apply it in a simple model of the Coasean firm. In particular, we identify circumstances in which evolutionary dynamics will minimize transaction cost, which allows various informal hypotheses about the relation between institutional evolution and transaction cost to be addressed in a precise sense.

Keywords: Transaction costs; evolutionary game theory; social institutions

JEL-codes: C72; D23; D61; D81

22 pages, April 1994

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