Measuring the costs of exchange

Abstract

When individuals choose -to obtain a good, to pursue a goal -the relevant prices facing them are the full opportunity costs of their choices.These opportunity costs incorporate not only the money price of the good but also the transaction costs of obtaining the good.Across individuals and groups, the full opportunity costs associated with attaining a good or goal may differ considerably even when the observed money prices do not.Better measures of these full costs can allow improved models of behavior.We define the cost of exchange C ijkm as the opportunity cost in total resourcesmoney, time, and goods-for an individual with characteristics i to obtain a good j using a given form of exchange k in institutional setting m.To measure a specific cost of exchange empirically, we 1) specify a particular transaction in detail, 2) select individuals with designated characteristics, in a designated market and institutional setting, and 3) interview them concerning the full time and money costs they have actually incurred to carry out the transaction.The illustrative data presented here show great variation across groups and countries in the costs of exchange, far more than the variation that is typically observed in money prices.Such variation is likely to affect what is produced and what exchanges take place in the market, which organizations and specialties survive, and even which rules of the game persist.

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