Resilience through Transaction Cost Economic Evaluation: Recognizing the Cost-Effectiveness of Sustainable Development

Abstract

In a step toward more economic and environmentally sustainable decision-making, this paper introduces transaction cost economics as a promising paradigm for revealing the cost-effectiveness of resilient infrastructure investments. Transaction cost economics is a theory and methodology for comparatively evaluating the cost-effectiveness of institutional arrangements governing transactions. Transaction cost theory was formulated to explain the economics of concessions and other forms of organization for delivering infrastructure goods and services. Research designs in transaction cost analysis are comparative, emphasizing the accumulated costs over time of one approach compared to another. Organizing research around comparative production and transaction costs, instead of price, creates an opportunity to internalize externalities, such as ecosystem services, into ex post evaluations of historical investment and ex ante analyses of alternative future development plans.Resilience theory provides a framework for applying analytical techniques to anticipate the effects of disturbances. Notions of resilience express the idea that the natural world is dynamic, highly specific, and ever-changing. In contrast, we build things that are static, standardized, and unable to adapt to either forces of nature or deliberate acts of destruction. Buildings and infrastructure are designed to tolerate a limited set of disturbances; when stressed beyond those limits, structures are subject to degradation and collapse. Evaluations of infrastructure investments today should take account of the cost of repeated cycles of investment and collapse over the long term. If applied to measure and remedy the costs of disturbances over time, transaction cost economic methodologies may form the basis for evaluating infrastructure projects for resilience, opening the possibility of recognizing economic and environmental co-benefits in infrastructure investments.

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