the cost of transacting
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THE COST OF TRANSACTING *
HAROLD DEMSETZ Introduction, 33. — The definition and measurement of on the New York stock exchange, 35. —The determination spread, 40. —The determination of the transaction rate, results, 46. —Summary and comments, 50. —Appendix I, 11,53. transaction cost of the ask-bid 45.—Statistical 52. —Appendix
Exchange and Enforcement of Property Rights," The Journal of Law and Economics, VII (1964). 2. See A. Alchian and W. Allen, University Economics (Belmont, Calif.; Wadsworth Publishing Company, 1967), pp. 49-50. 3. The cost of using a specialized medium of exchange is essentially the cost of holding an inventory of money. The greater is the number of goods whose prices are relatively independent, the lower will be the risks associated with fluctuations in the value of this inventory, and the greater is the time rate of exchange, the lower will be the expected cost per transaction of inventorying money.
* The author wishes to thank George J. Stigler for advice, encouragement, and particularly for his incessant prodding.
34
ห้องสมุดไป่ตู้
QUARTERLY JOURNAL OF ECONOMICS
L A more detailed discussion of the relationship between transaction cost and efficiency can be found in R. H. Coase, "The Problem of Social Cost," The Journal of Law and Economics, III (Oct. 1960), and H. Demsetz, "The
The empirical work in this paper is a study of the cost of transacting on a very important market, the New York Stock Exchange, but the economics of transacting, of which this paper is a beginning, has an importance that extends beyond particular markets and that argues against the general neglect accorded the subject by economists. This can be grasped by considering the operation of an economic system in which transaction cost is zero. The usual sources of ineflficiency fail to exist in such an economic system. Externalities? Persons subjected to harmful effects will, at zero negotiating and contracting cost, bring the value they attach to a reduction of these effects to the attention of whoever produces the harmful effects. The value placed on reducing these effects will be compared, again through costless negotiations, with the value attached by others to the benefits associated with the production of these effects. In response to such costless bidding by rivals, the output of harmful effects will be brought to efficient levels. Monopolies? It will be profitable for agreements to be reached, again at zero transacting cost, between buyers and sellers that lead to efficient output rates in return for side payments. Efficient rates of output yield a bigger pie to be shared by all, so that in a milieu of costless transactions, utility maximization will yield efficient allocations even in the presence of monopoly and monopsony. Of course, the existence of positive transacting cost has no direct relevance to economic inefficiencies. As with any cost, the question that is relevant for efficiency is whether or not the cost is appropriately economized. In some cases it will be efficient to have markets in which negotiations are carried forth to bring costs and benefits to bear on economic decision units. The value of realigning resources as a result of such negotiations is expected to be worth the cost of transacting. In other cases it will be efficient not to
negotiate; in a world of positive transacting cost some external and monopoly effects are consistent with efficiency. None of this makes unimportant the usual questions concerning the role of government in the resolution of externality and monopoly problems. For there are cases in which the cost of government action is less than the cost of transacting in markets. In such cases, we will employ government action that realigns resources more completely than can be achieved economically in the market place.^ In addition to these areas of application, the economics of transactions will be the core of an economic theory of money, for exchange will tend to be conducted in ways that economize on the cost of transacting.^ An economic theory of money must inquire into what conditions favor the use of a specialized medium of exchange, for there seem to be circumstances in which barter appears more economical. "Portability, storability, and divisibility," words frequently marshaled to describe an economical money, become quantifiable characteristics when they are treated as methods for reducing the cost of transactions.^ The above subjects are beyond the scope of the present study, but the work presented below will shed some light on why the New York Stock Exchange (NYSE) has dominated for so long the organized trading of securities, and the empirical estimates to be given will enable us to reevaluate intuitive notions about imperfections in the capital markets; how much of the difference in borrowing costs between large and small firms can be attributed to differences in the cost of transacting rather than to imperfections in the capital market? But the more general question we seek to investigate is the extent to which transaction costs are affected by the scale of trading. This aspect of trading, always of interest to economists, has implications that extend beyond the NYSE. Do standardization and delegation of transacting authority result in marketing scale economies? The NYSE provides us with an important source of data by which
HAROLD DEMSETZ Introduction, 33. — The definition and measurement of on the New York stock exchange, 35. —The determination spread, 40. —The determination of the transaction rate, results, 46. —Summary and comments, 50. —Appendix I, 11,53. transaction cost of the ask-bid 45.—Statistical 52. —Appendix
Exchange and Enforcement of Property Rights," The Journal of Law and Economics, VII (1964). 2. See A. Alchian and W. Allen, University Economics (Belmont, Calif.; Wadsworth Publishing Company, 1967), pp. 49-50. 3. The cost of using a specialized medium of exchange is essentially the cost of holding an inventory of money. The greater is the number of goods whose prices are relatively independent, the lower will be the risks associated with fluctuations in the value of this inventory, and the greater is the time rate of exchange, the lower will be the expected cost per transaction of inventorying money.
* The author wishes to thank George J. Stigler for advice, encouragement, and particularly for his incessant prodding.
34
ห้องสมุดไป่ตู้
QUARTERLY JOURNAL OF ECONOMICS
L A more detailed discussion of the relationship between transaction cost and efficiency can be found in R. H. Coase, "The Problem of Social Cost," The Journal of Law and Economics, III (Oct. 1960), and H. Demsetz, "The
The empirical work in this paper is a study of the cost of transacting on a very important market, the New York Stock Exchange, but the economics of transacting, of which this paper is a beginning, has an importance that extends beyond particular markets and that argues against the general neglect accorded the subject by economists. This can be grasped by considering the operation of an economic system in which transaction cost is zero. The usual sources of ineflficiency fail to exist in such an economic system. Externalities? Persons subjected to harmful effects will, at zero negotiating and contracting cost, bring the value they attach to a reduction of these effects to the attention of whoever produces the harmful effects. The value placed on reducing these effects will be compared, again through costless negotiations, with the value attached by others to the benefits associated with the production of these effects. In response to such costless bidding by rivals, the output of harmful effects will be brought to efficient levels. Monopolies? It will be profitable for agreements to be reached, again at zero transacting cost, between buyers and sellers that lead to efficient output rates in return for side payments. Efficient rates of output yield a bigger pie to be shared by all, so that in a milieu of costless transactions, utility maximization will yield efficient allocations even in the presence of monopoly and monopsony. Of course, the existence of positive transacting cost has no direct relevance to economic inefficiencies. As with any cost, the question that is relevant for efficiency is whether or not the cost is appropriately economized. In some cases it will be efficient to have markets in which negotiations are carried forth to bring costs and benefits to bear on economic decision units. The value of realigning resources as a result of such negotiations is expected to be worth the cost of transacting. In other cases it will be efficient not to
negotiate; in a world of positive transacting cost some external and monopoly effects are consistent with efficiency. None of this makes unimportant the usual questions concerning the role of government in the resolution of externality and monopoly problems. For there are cases in which the cost of government action is less than the cost of transacting in markets. In such cases, we will employ government action that realigns resources more completely than can be achieved economically in the market place.^ In addition to these areas of application, the economics of transactions will be the core of an economic theory of money, for exchange will tend to be conducted in ways that economize on the cost of transacting.^ An economic theory of money must inquire into what conditions favor the use of a specialized medium of exchange, for there seem to be circumstances in which barter appears more economical. "Portability, storability, and divisibility," words frequently marshaled to describe an economical money, become quantifiable characteristics when they are treated as methods for reducing the cost of transactions.^ The above subjects are beyond the scope of the present study, but the work presented below will shed some light on why the New York Stock Exchange (NYSE) has dominated for so long the organized trading of securities, and the empirical estimates to be given will enable us to reevaluate intuitive notions about imperfections in the capital markets; how much of the difference in borrowing costs between large and small firms can be attributed to differences in the cost of transacting rather than to imperfections in the capital market? But the more general question we seek to investigate is the extent to which transaction costs are affected by the scale of trading. This aspect of trading, always of interest to economists, has implications that extend beyond the NYSE. Do standardization and delegation of transacting authority result in marketing scale economies? The NYSE provides us with an important source of data by which