<P>Transaction Costs by Douglas Allen<BR><BR>893<BR>0740<BR>TRANSACTION COSTS<BR>Douglas W. Allen<BR>Associate Professor<BR>Department of Economics - Simon Fraser University<BR>© Copyright 1999 Douglas W. Allen<BR>Abstract<BR>This chapter addresses the history, use and significance of the term transaction<BR>costs. Few words in the economic language have been more abused or fought<BR>over and this is shown to result from the emergence of two distinct definitions<BR>and uses. The ‘Neoclassical’ definition rests on the costs of trading across a<BR>market, while the ‘property rights’ definition centers on the costs of<BR>establishing and enforcing property rights. In articulating these two separate<BR>definitions and in demonstrating their relationship and separate uses, it is<BR>hoped that more progress can be made in the field of transaction cost<BR>economics.<BR>JEL classification: K0, L0, L2, D0, D8<BR>Keywords: Transaction Costs, Property Rights, Coase Theorem<BR>1. Introduction<BR>Transaction costs. Do another two words exist in the economic lexicon that<BR>generate as much friction? Conceptually introduced in Coase’s 1937 paper ‘The<BR>Nature of the Firm’ as simply ‘the cost of using the price mechanism’ (Coase,<BR>1988, p. 38), the words ‘transaction costs’ have evolved to the point where<BR>some skeptics claim they include any cost that is convenient and elusive enough<BR>to avoid critical examination (Niehans, 1987, p. 678). Advocates, on the other<BR>hand, have hailed the recognition of these costs as revolutionary and as<BR>important conceptually as ‘marginalism’ and ‘substitution’ (Cheung, 1983, p.<BR>21).<BR>The ambiguity that surrounds the concept of transaction costs stems, in<BR>large part, from the existence of two literatures simultaneously claiming<BR>ownership over the term. The ‘property rights’ literature begins with Coase and<BR>has consistently focused on the role transaction costs play in determining the<BR>distribution of property rights, broadly defined as all laws, rules, social customs<BR>and organizations that generate incentives for behavior. This literature has<BR>called into question fundamental concepts like efficiency and the nature of<BR>production. Though based in neoclassical economics, this literature has evolved<BR>beyond the neoclassical model and has produced the new sub-fields of ‘law and<BR>economics’, the ‘new economic history’ and the ‘new institutional economics’. </P>

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