Formulation of Economic Policy: A Political Economy Perspective on Transaction Costs: A Political Economy Perspective on Transaction Costs

Author: Dixit
Publisher:
Publish Date: 2004-01-01
Features: In this groundbreaking work, Dixit emphasizes that trade policies in many countries differ significantly from the recommendations proposed by economists. Without incorporating politics into the analysis, it is difficult to understand these differences. The same applies to other economic policies. He then proposes a better approach from the perspective of transaction costs to understand the role of politics in the process of economic policy-making. The costs of planning, implementing, and monitoring a transaction have been proven to be central to explaining many industrial organization phenomena. Subsequently, he discusses the various transaction costs faced in the political process of formulating economic policies and explains how these costs affect the functioning of different systems and policies. The author also uses this analytical framework to explore rapidly developing research in political economy. He employs U.S. fiscal policy and the General Agreement on Tariffs and Trade (GATT) as case studies to illustrate the framework and demonstrate how policies deviate from the ideal efficiency standards proposed by economists. At the same time, this method reveals that some practices that appear inefficient are, in fact, highly effective in addressing transaction costs caused by opportunism and information asymmetry.