TRANSACTION COSTS (Wallis & North)
What two broad sectors do Wallis & North divide the economy into?
Transformation sector and transaction sector
What limits our ability to make perfect decisions?
Bounded rationality.
What is the specific type of transaction the Internet reduces?
Information Costs
What is the key assumption required for a “perfect market” from the readings?
Zero transaction costs
What type of resources increase as the transaction sector expands?
Resources used for coordination (not production)
What type of activity is management classified as in their framework?
Transaction activity
What problem arises when actions cannot be fully monitored?
Moral hazard
What is the main channel through which the Internet increases economic growth: demand or supply?
Supply
What limitation prevents auctions from being widely used in all markets?
Need to gather all participants at the same time
Why does economic growth increase the need for institutions?
More complex exchanges require coordination
What is one key challenge in measuring transaction costs?
Activities often mix production and transaction roles
When transaction costs fall, do firms get bigger or smaller?
Smaller
What is the process of bringing many buyers and sellers together online called?
Aggregation
What happens to the number of transactions when costs fall?
It increases.
Why can economic growth increase the need for incomplete contracts?
Greater uncertainty and complexity
What is one reason technological progress can increase total transaction costs?
It increases complexity
What condition defines an institutional equilibrium?
Formal and informal rules are stable together
Does the Internet remove intermediaries or replace them?
Replaces them.
What type of contract is impossible in real-world markets?
Complete contract
Why can rapid institutional change harm economic growth?
It disrupts existing informal rules and trust
Why do firms not eliminate transaction costs entirely, even internally?
Internal coordination also has costs
What is necessary for markets to function when contracts are incomplete?
Trust
What key problem still remains even when information is widely available online?
Information asymmetry
What fills the gaps left by incomplete formal institutions?
Informal rules
Why might the Internet increase economic growth, but NOT increase firm profits?
Because increased competition lowers prices and reduces profit margins