Transaction Costs as Measurement of Institutionally Led Structural Changes

Abstract

This paper aims to bind economic ideas outside of the mainstream with the established techniques of input-output analysis. New Institutional Economics brings out the concept of transaction costs as those costs that economic agents pay in order to exchange the results from their production and thus reap the benefits from the labour division. The process of economic exchange can be easier or more difficult, that is to say costly, depending on the rules for this activity. “Rules of the game” in a society are built in institutions. Therefore institutions and institutional change are as important as technologies and technological change. The paper presents a partial model for analyzing the results from the interactions between institutional and technological changes that happen at economy-wide level. It is is a modification of the original framework of Wallis and North (1994) because it uses nominal data. The input data come from an international database and this allows reliable inter-country comparisons. The model is tested with 20 countries for two 5-years periods. Examples of successful and unsuccessful structural changes are given. The model can identify if the consequences from these different impulses are synchronized and if this led to improvement in the overall efficiency of the economy. Also, it discerns economies with sluggish sectors that might fail the whole system in its future development.