Friday, 26 March 2010: 14:30
Transaction cost are typically perceived in the economic theory as a hindrance to optimal allocation of resources. The lower transaction costs are, the more efficiently the economy operates and optimal allocation of resources should go hand in hand with the efficient markets hypothesis fulfilled. This preposition is basically right. However, transaction costs are an effect of certain services provided. Elimination of transaction costs may either mean that these services become more effective or that the services themselves are eliminated or that their quality declines and thus allows for lower costs. The latter situation needn’t be good for the economy. Moreover, transaction costs forestall the fulfillment of the efficient market hypothesis, given other conditions of the hypothesis are in place. We are now more conscious than ever that market participants are not fully rational and that financial markets don’t operate in the efficient way, least because of transaction costs. This may suggest that the role of transaction costs in this less-than-ideal world should be reconsidered. These remarks justify the question chosen for the title of the paper: does it always pay off to eliminate transaction costs?
The aim of the paper is to answer this question. In fact, it is intended to identify and analyze situations when eliminating transaction costs may have a negative impact on the economy. It is not the aim of this paper to build a general, formal preposition which would contradict the theoretical statement that transaction costs hinder optimal allocation of resources; the statement is right if only we can take into consideration the context that determines the results and we don’t interpret the statement unconditionally. When we accept this reservation it may rescue us from making mistakes driven by a false pursuit of efficiency.
The paper discusses three examples of eliminating transaction costs: declining credit costs due to securitization and the simplification of bank procedures of client creditworthiness assessment, introduction of a common currency and the effects of low transaction costs for international capital movements. These examples range from a real –world policy analysis to theoretical reasoning and literature review. They serve to develop the main argument of the paper that sometimes it is better not to put too much emphasis on eliminating transaction costs.
The aim of the paper is to answer this question. In fact, it is intended to identify and analyze situations when eliminating transaction costs may have a negative impact on the economy. It is not the aim of this paper to build a general, formal preposition which would contradict the theoretical statement that transaction costs hinder optimal allocation of resources; the statement is right if only we can take into consideration the context that determines the results and we don’t interpret the statement unconditionally. When we accept this reservation it may rescue us from making mistakes driven by a false pursuit of efficiency.
The paper discusses three examples of eliminating transaction costs: declining credit costs due to securitization and the simplification of bank procedures of client creditworthiness assessment, introduction of a common currency and the effects of low transaction costs for international capital movements. These examples range from a real –world policy analysis to theoretical reasoning and literature review. They serve to develop the main argument of the paper that sometimes it is better not to put too much emphasis on eliminating transaction costs.