The Role of Transactions Costs in Economic Growth

Mathematical programming is used in this paper to analyse consumer preferences, consumption from stock, production, and exchanges involving transactions costs, or more accurately, involving resource use in facilitating transactions. The familiar results are obtained, for example that economic welfare and growth are enhanced by greater stocks of resources, or by improvements in production technology. A new result is that economic welfare and growth also depend on transactions costs, or resource use in transactions. Economic growth is increased by lower rates of resource use, or lower transactions costs.

This new theory underpins some older empirical work, for example on international trade and growth, and also Harold Badinger’s work on evaluating the benefits of European Union to member states, which relates GDP per person, in effect, to reductions in indices of transactions costs. It can also be related to Amartya Sen’s Development as Freedom.