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Transaction Cost Economics

Transaction costs can be defined as the costs of specifying, reaching agreement on, and enforcing contracts. The purpose of contracts, in turn, is to facilitate exchange (the vehicle for generating gains from trade between two or more parties). In contrast to the traditional (neoclassical) economics treatment of transactions, typically between anonymous buyers and sellers, in which no costs of transactions are recognized and all transactions somehow take place at a market-clearing price, transaction cost economics emphasizes that in reality these costs are large and indeed can lead to market failure. Indeed, at the macroeconomic level, transaction costs can include the costs of the many political and economic organizations that provide the stable social environments within which transactions take place. This entry explains how transaction costs ...

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