Ever since Coase brought it into economic analysis in1937, the concept of transaction cost is widely used in economics. Transaction cost is the basic concept of New Institutional Economics, and is often used in micro and macro economics. But it is also a concept full of disputations, the reason of which is that economists in different fields and from different point of view gave transaction cost different concepts and meanings. There are institutional, contractual and property rights explanations of transaction cost. There are also different transaction costs in different field such as market, institution and organization. Not all these conceptions of transaction cost often have the same meaning nevertheless.This main purpose of this paper is try to answer two questions: lWhat exactly is transaction cost?2What does transaction cost contain?By comparing the main conception of transaction cost, this paper brings out a conception of transaction cost which is of all the useful stuff: transaction costs are all the costs occurred to make sure that the transactions can be accomplished effectively, which is composed of institutional costs and true costs. This paper holds the view that the institution can be divided into two parts:institutional rules and organizations. Institutional rules contain formal and informal rules. Organizations contain markets and firms. By structuring transaction costs and informing the connotation of transaction costs, this paper tries to bridge theoretical concepts and true costs.This paper is of five chapters. The fist chapter is “the introduction”. This chapter designs the framework if the whole paper, explains the research background purpose and meanings. The second chapter is “the explanation and comparison of the important concepts of transaction cost”. This chapter introduces the most important concepts of transaction cost advanced by Coase, Arrow, Alchian, Demsatz, Chueng, Williamson, North, Barzel and so on. The third chapter is “the basic assumptions underneath transaction costs”. The existence of transaction costs means that the traditional assumption of “economic man” is not appropriate any more and that we need to make new assumptions to adapt to the new circumstances with transaction costs in economic analysis. A new system of assumptions has come to use by generations of economists’hard work, including opportunism behaviour, limited rationality and imperfection information. The fourth chapter is “the structure of transaction cost”. Transaction costs are the costs occurred in using all kinds of institutions, including the cost of using institutions and the “real costs” put forward by Arrow in1965. The institution used in this paper is generalized which means it includes organizations such as market and firm as well as rules such as the law. Institution itself is costly, including the costs of building and maintaining it. Every institution affects human behaviour. Human make their choices to maximize their utility under triple constraints of physics, economy and institution. But institutions do not necessarily increase human utility. On the contrary they often reduce human utility by distorting human behaviours, the reduction of which is named here as distortion costs. This paper divides the costs of using institutions into the costs of the rules, the costs of using markets and the costs of using firms. The costs of the rules include formal and informal rules. The costs of using markets and firms include the costs of building and maintaining them and the distortion costs aroused by them. The real costs of transactions, which could be reduced by using different technology and institution, include the costs of transportation, storage and the time and money spent on transactions. The fifth chapter is “the conclusion”. By the previous discussion this paper concludes that transaction costs are composed of institutional costs and real costs occurred in transactions and are determined by techniques and institution.
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