Title: A TRANSACTION COST ANALYSIS OF BANKING ACTIVITY AND DEPOSIT INSURANCE
Abstract: In neoclassical price theory the firm is a black box and there are no banks. Into the box go labor and capital and out come products; the apparatus is driven by wealth maximization and governed by the laws of returns. At the individual firni level, activities are guided by market prices. If prices direct the patterns of specialization and exchange, what does the black box contain? What does “the firm” do? What does the banking firm do? The suggestionofRonald Coase (1937) that firms were alternatives tomarkets and served to reduce and control transactions costs remained sterile until further suggestions came forth as to the nature of these transactions costs. What can make markets so expensive that spot exchanges are abandoned and replaced by restraining agreements organized in institutions called firms? Two possibilities have yielded fruit—the costs associated with ascertaining quality and with negotiating price. Explicit consideration of these costs has enriched the theory of the firm and given us insight into the forces that determine what assets the firm owns, how ownership is structured, how firms are financed, the assignment of liability, and other aspects of corporate organization as well. The early explorers of transactions costs set out on two very different expeditions. The first expedition went armed with the notions of moral hazard and adverse selection; it headed off in the direction of insurance and risk and ventured successfully into generalized
Publication Year: 1988
Publication Date: 1988-01-01
Language: en
Type: article
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Cited By Count: 13
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