On the Optimal Number of Contract Types

2019 ◽  
Vol 20 (2) ◽  
pp. 487-510
Author(s):  
Oren Bar-Gill ◽  
Clayton P. Gillette
Keyword(s):  
Political Economy ◽  
Transaction Costs ◽  
Infinite Number ◽  
Market Failure ◽  
Optimal Number ◽  
Access To Information ◽  
Market Failures ◽  
Information Costs ◽  
Contract Type ◽  
Optimal Quantity

Abstract The theoretical availability of an infinite number of contract types suggests that there may be an optimal quantity from which contractual parties could make a selection. In this Article, we emphasize the difficulty of identifying that optimal number, given information costs and other transaction costs related to the production of a contract type. We argue that standard market failures might cause markets to produce a suboptimal number of contract types. We then consider whether government should intervene to remedy any market failure. We conclude that government would generally lack the access to information necessary to identify the optimal number of contract types. Moreover, we argue that issues of political economy would impede the ability of government to achieve the optimal number of contract types, even if it were able to identify that number. Government, that is, may tend to either oversupply or undersupply contract types. Perhaps the best that government can do is to provide “soft” interventions that reflect appropriate defaults or safe harbors.

scholarly journals Asymmetric Information, Transaction Costs, and Farmers Decision To Participate In Tobacco Voor-Oogst Kasturi Contract Farming

Agro Ekonomi ◽  
2021 ◽  
Vol 32 (2) ◽  
Author(s):  
M Rondhi
Keyword(s):  
Decision Making ◽  
Asymmetric Information ◽  
Transaction Costs ◽  
Market Failure ◽  
Information Costs ◽  
Related Factors ◽  
Transfer Product ◽  
Long Time ◽  
Additional Costs ◽  
Land Size

Contracts participation between tobacco farmers and traders is still low even benefit of contract is huge. This is related to factors that affect to the contract, demographics, farm characteristic, and other related factors.  Contracts that initially became a tool to prevent market failure because it regulates how economic actors act against other, turns out to cause transaction costs as a result of asymmetric information that makes the contract does not function ideally. Therefore, this study attempts to explain asymmetry information during the transfer product and the potential transaction costs incurred using the New Institutional Economy approach. Beside that, this study also attemps to explain factors that underlie farmers decision making partnership, that were analized by using the analyst logistic regression.Respondents in this study were 100 respondents, 50 tobacco contract farmers, and 50 independent farmers from December 2018 through January 2019. The results showed that asymmetric information caused adverse selection and moral hazard, as many as 30% farmers had sold products to other parties and 8% of farmers had used pesticides that prohibited by traders. Contracts that are not ideal due to asymmetric information must be re-enforced by using additional costs called transaction costs which are divided into three typess, namely search and information costs, cost to design, negotiate and conclude and the monitor and contract enforcement costs. Monitoring costs have the potential to absorb the largest portion compared to other types of transaction costs. The greater the asymmetric information generated, the greater the transaction costs incurred. Then the factors that significantly influence the decision making of tobacco farmers to partnership are long time farming experience, land size, risk aversion level, certainty of price and source of capital.

scholarly journals Economics versus politics: pitfalls of policy advice

2013 ◽  
pp. 4-28
Author(s):  
D. Acemoglu ◽  
J. Robinson
Keyword(s):  
Political Economy ◽  
Economic Policy ◽  
Economic Efficiency ◽  
Policy Making ◽  
Market Failure ◽  
Careful Analysis ◽  
Economic Policies ◽  
Market Failures ◽  
Main Message ◽  
The Impact

The standard approach to policy making and advice in economics implicitly or explicitly ignores politics and political economy and maintains that if possible, any market failure should be rapidly removed. This essay explains why this conclusion may be incorrect; because it ignores politics, this approach is oblivious to the impact of the removal of market failures on future political equilibria and economic efficiency, which can be deleterious. We first outline a simple framework for the study of the impact of current economic policies on future political equilibria — and indirectly on future economic outcomes. We then illustrate the mechanisms through which such impacts might operate using a series of examples. The main message is that sound economic policy should be based on a careful analysis of political economy and should factor in its influence on future political equilibria.

scholarly journals Egypt: The Environment For Adjustment To Trade Liberalization

2011 ◽  
Vol 6 (7) ◽  
Author(s):  
Abeer Elshennawy
Keyword(s):  
Transaction Costs ◽  
Trade Liberalization ◽  
Free Trade ◽  
Capital Markets ◽  
Market Failure ◽  
Adjustment Costs ◽  
Potential Effect ◽  
Market Failures ◽  
Speed Of Adjustment ◽  
Macroeconomic Environment

This paper investigated the potential effect of market failures in labor and capital markets in addition to market failure due to high transaction costs on the transitional path to trade liberalization. All three types of market failure were found to reduce the speed of adjustment to free trade and contribute to high adjustment costs. The paper also examined the consistency of the macroeconomic environment with the objectives of trade liberalization. It is postulated that a macroeconomic environment that is basically recessionary is likely to lead to high adjustment costs.

scholarly journals Economics versus Politics: Pitfalls of Policy Advice

2013 ◽  
Vol 27 (2) ◽  
pp. 173-192 ◽  
Author(s):  
Daron Acemoglu ◽  
James A Robinson
Keyword(s):  
Political Economy ◽  
Economic Policy ◽  
Economic Efficiency ◽  
Policy Making ◽  
Market Failure ◽  
Careful Analysis ◽  
Economic Policies ◽  
Market Failures ◽  
Main Message ◽  
The Impact

The standard approach to policy making and advice in economics implicitly or explicitly ignores politics and political economy and maintains that if possible, any market failure should be rapidly removed. This essay explains why this conclusion may be incorrect; because it ignores politics, this approach is oblivious to the impact of the removal of market failures on future political equilibria and economic efficiency, which can be deleterious. We first outline a simple framework for the study of the impact of current economic policies on future political equilibria—and indirectly on future economic outcomes. We then illustrate the mechanisms through which such impacts might operate using a series of examples. The main message is that sound economic policy should be based on a careful analysis of political economy and should factor in its influence on future political equilibria.

Discontinuous Institutional Alternatives in the Context of Economy Deregulation

2004 ◽  
pp. 94-110 ◽  
Author(s):  
A. Shastitko
Keyword(s):  
Market Failure ◽  
Transaction Management ◽  
Market Failures ◽  
Relative Cost ◽  
State Participation

Various ways of state participation in the mechanisms of transaction management are considered in the article. Differences between compensation and elimination of the market failures are identified. Opportunities and risks of non-regulatory alternatives usage as a mean of market failure compensation are described. Based on classification of goods correlated to relative cost of their useful characteristics evaluation (search, experience, merit) questions of institutional alternatives in three areas (political, financial and commodity) are examined.

scholarly journals Problems of Overcoming Market Failures in the Context of Economic Crisis in the Euro Area

2014 ◽  
pp. 162-167
Author(s):  
A. Y. Pluiko
Keyword(s):  
Economic Development ◽  
Economic Crisis ◽  
Euro Area ◽  
Market Failure ◽  
World Market ◽  
Economic Governance ◽  
Market Failures ◽  
Single Currency ◽  
Poor Countries ◽  
Money Circulation

The article analyses the manifestations of a market failure problem revealed during the economic crisis in the euro area, namely business cycles, market inability to ensure money circulation and avoid inflation. It is shown that the cyclicity of economic development has revealed in various degrees of economic contraction and different rates of its recovery. These differences have been exacerbated by the new procyclical factors emerged from the transition to a single currency. As for money circulation the crisis has almost no impact on the single currency functioning: the euro has maintained its position on the world market and properly performed money functions in the domestic. The goal to achieve economic development without inflation in the euro area generally has been solved successfully by the European Central Bank (ECB). However, due to the fact that the ECB in its monetary policy does not pay sufficient attention to the increased inflation in small and relatively poor countries, the crisis has been more acute in them than in large countries with low inflation. The goals of ensuring money circulation and avoiding inflation can be settled more effectively in the euro area in case of more tight coherence in economic policy and strengthening of supranational mechanisms of economic governance.

From Silos to Barns? Regional Institutions in International Political Economy

2021 ◽  
Author(s):  
Etel Solingen
Keyword(s):  
Political Economy ◽  
Critical Theory ◽  
Transaction Costs ◽  
Political Science ◽  
Economic Efficiency ◽  
International Political Economy ◽  
Regional Economic ◽  
Regional Institutions ◽  
Ongoing Work ◽  
The Common

The explosion of research on regional economic institutions (REI) over the last two decades has led to a richer understanding of why they emerge, what form they take, and what effects they have. This chapter argues that research on REI is not a monopoly of any particular theoretical, methodological, or epistemological approach. Ongoing work leans not merely on standard political science and economics but on sociology, psychology, and critical theory. Yet, REI studies cluster in silos more often than barns, although this chapter highlights some research programs with potential for fostering barns. Exclusive attention to power, economic efficiency, transaction costs, and transnational normative diffusion—the common analytical currency in standard accounts of REI—may conceal deeper domestic drivers underlying REI dynamics.

How A Social Enterprise Wanes: The Transaction Costs of Credible Commitments at Etsy.com

2021 ◽  
pp. 026010792110382
Author(s):  
Alejandro Agafonow ◽  
Marybel Perez
Keyword(s):  
Political Economy ◽  
Transaction Costs ◽  
Transaction Cost ◽  
Social Enterprise ◽  
Economic Transition ◽  
Transaction Cost Economics ◽  
Credible Commitments ◽  
Social Mission ◽  
Corporate World ◽  
Online Marketplace

This article fathoms how a social enterprise wanes by applying the construct of imperative credible commitments from transaction cost economics to the case of Etsy.com, an online marketplace created to connect artisans and craftwork enthusiasts. In the absence of imperative credible commitments, Etsy’s social mission was bound to change, leaving the company’s major stakeholders without safeguards to protect the perpetuation of the transactions that Etsy was created to serve. The construct of credible commitments has proved to be fertile in understanding issues of political and economic transition, yet its relevance to puzzle out the corporate world has been underestimated. To bridge this gap, we have recourse to the analogy between disabling the discretion of monarchs and executives to prevent them from reneging on commitments. Hence, by building on political economy academics’ attention is drawn to strategies that, despite existing in the corporate world, have rarely been perceived as important by management and economics scholars.

A Discussion Paper on Cybersecurity Policies

2017 ◽  
pp. 155-165
Author(s):  
Ayse Kok
Keyword(s):  
Government Regulation ◽  
Market Failure ◽  
Government Intervention ◽  
Main Argument ◽  
Market Failures ◽  
Discussion Paper

This chapter presents various reasons for the insufficiency of externalities in terms of the inference of market failure with regard to the field cybersecurity policy, which is claimed to be necessary for government intervention. The main argument of this chapter is that cybersecurity market failures are much smaller than initially assumed, and as a result, more harm might be done by trying to correct them through naïve government regulation.

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