Transaction Costs, Trust, and the Structuring of Markets

Robertson, Paul L. (2006) Transaction Costs, Trust, and the Structuring of Markets. Discussion Paper No. 342, School of Economics, The University of Queensland.

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Author Robertson, Paul L.
Title Transaction Costs, Trust, and the Structuring of Markets
School, Department or Centre School of Economics
Institution The University of Queensland
Report Number Discussion Paper No. 342
Publication date 2006-10-01
Subject 340000 Economics
340205 Industry Economics and Industrial Organisation
Abstract/Summary This paper examines the institutional arrangements that develop when the risks of opportunism and other contributors to transaction costs are high but transactions are nevertheless necessary for economic efficiency. Williamson's argument that high levels of transaction costs lead firms to choose vertical integration (hierarchical organisation) in preference to using markets is well known. But this is far from the whole story because markets are not uniform. In fact, modern "market economies" embrace a wide range of institutions for exchanging ownership of goods and services. The types of transactions undertaken are not only varied, but some important markets are themselves hierarchies that are structured in ways that are analogous to firms precisely in order to reduce their costs of operation, including the transaction costs that arise from using them. In this paper, I look at the evolution of a select but important group of markets that have been consciously constructed over long periods and with frequent modifications because of environmental change and learning by participants. These are markets in which the use of up-to-date information is especially important because conditions may alter quickly, and in which risk, uncertainty, and the potential for opportunistic behaviour are factors that affect their operations in significant ways. When transaction and agency costs arise in such markets, responses have concentrated on finding mechanisms for reducing them to tolerable levels rather than on abandoning transactions altogether through the internalisation of activities. The logic of constructed markets is illustrated by an examination of the evolution of membership regulations by the London and New York Stock Exchanges in the nineteenth and early twentieth centuries.
Keyword transaction costs
constructed markets
stock markets

Document type: Department Technical Report
Collection: Discussion Papers (School of Economics)
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Created: Mon, 16 Oct 2006, 10:00:00 EST