Transaction Costs

Transaction costs are the costs of exchange incurred when firms engage in economically motivated relationships. There are four distinct forms of transaction costs: search, contracting, monitoring, and enforcement costs. Search costs are the costs of gathering information for identifying and assessing potential trading partners. Contracting costs are costs of negotiating a mutually beneficial contract or agreement. Monitoring costs are the costs of ensuring that each party to the contract or agreement fulfills his or her obligations. Finally, enforcement costs are the costs of sanctioning the party not performing according to the terms of the contract or agreement. All forms of exchange are subject to different levels of transaction costs. They are socially important, in addition to being economically unavoidable, because they represent a deadweight, or ...