The Economics of Transaction Costs: Theory, Methods and by P. K. Rao (auth.)

By P. K. Rao (auth.)

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Extra info for The Economics of Transaction Costs: Theory, Methods and Applications

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In the latter case, institutions evolving towards TC minimization are treated as though this automatically implies efficiency maximization. In some cases, the two criteria coincide, but this does not hold in a general scenario. We need to introduce the concept of convexity, since it plays an important role in formal TCE. Briefly, a convex function possesses a minimum, and the function can be subjected to minimization via changes in the argument, under regularity conditions of the function; a function f is called convex on a domain set C if the following property holds: f [(1 � v)x ‡ vy] < or ˆ (1 � v)f (x) ‡ vf ( y) where 0 > v > 1, and and x and y are in C.

The critical roles of firms and markets as the main infrastructure of functioning (rather, performing) economies is to be seen in terms of the TC minimization process underlying the economy and its dynamic structures. As Machlup (1978, p. 414) stated, the firm as a theoretical construct has neither less nor more than the kind of information the theorist chooses to endow it with `in order to design a good, useful theory'. The usefulness of the theory lies in its practical application and verification.

The assessment of alternate forms of governance is a critical issue, and this governance is not necessarily evaluated in terms of optimization methods. These methods enable some quantified results, given a broader framework that provides the institutional configuration for resource optimization. Also, TC exist in some cases for a reason; these are irreducible in some cases where legal and other stipulations require some provisions to be complied with even if the absence of the stipulations reduces TC.

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