Transaction Costs and Market Institutions: Grain Brokers in Ethiopia

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1. INTRODUCTION
Transaction costs arise in the course of market exchange and involve the costs
of information, search, negotiation, screening, monitoring, coordination, and
enforcement. 1
Transaction costs vary by individual, leading to heterogeneous
market behavior (Bardhan,1989; Sadoulet and de Janvry, 1995). The specificity
of transaction costs to individual agents implies that these costs are endogenous
to the behavior of market participants and are thus unobservable at the market
level. Individual efforts to minimize transaction costs lead to the emergence of
alternative institutional arrangements. The link between transaction costs and
the emergence of institutions has long been recognized in institutional economics
theory (Alchian and Demsetz, 1972; Coase, 1937; Hoff and Stiglitz, 1990; North,
1990; Williamson, 1985). However, the inherent difficulty of measuring
transaction costs at the level of market agents has limited empirical studies of
whether particular institutions indeed effectively minimize transaction costs. Yet,
empirical analysis is particularly warranted in contexts in which agents operate in
a weak market environment and where transaction costs are presumed to be
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Transaction costs are defined here as costs related exclusively to the coordination of
exchange among market actors, distinct from the physical costs of transferring goods, such as
transport, handling, and storage costs.