TRANSACTION COSTS AND ECONOMIC DEVELOPMENT IN NIGERIA

CHAPTER ONE

INTRODUCTION

1.1       BACKGROUND TO THE STUDY

Economic development of countries is shaped by the way they evolved. Although, transaction and production cost is determined by their level of technological advancement and industrialization. In this light, this study is examining the relationship between the transaction costs and economic development in Nigeria.

A transaction cost is a cost incurred in making an economic exchange of some sort, or in other words the cost of participating in a market. Transaction costs can be divided into search and information costs, bargaining costs and policing and enforcement costs (Klaes, 2008). Search and information costs are costs such as in determining that the required good is available on the market, which has the lowest price, etc. Bargaining costs are the costs required to come to an acceptable agreement with the other party to the transaction, drawing up an appropriate contract and so on. On asset markets and in market microstructure, the transaction cost is some function of the distance between the bid and ask. Policing and enforcement costs are the costs of making sure the other party sticks to the terms of the contract, and taking appropriate action (often through the legal system) if this turns out not to be the case. For example, the buyer of a used car faces a variety of different transaction costs. The search costs are the costs of finding a car and determining the car’s condition. The bargaining costs are the costs of negotiating a price with the seller. The policing and enforcement costs are the costs of ensuring that the seller delivers the car in the promised condition (Dahlman, 2009).

The term transaction cost is frequently thought to have been coined by Ronald Coase, who used it to develop a theoretical framework for predicting when certain economic tasks would be performed by firms, and when they would be performed on the market. However, the term is actually absent from his early work up to the 1970s. While he did not coin the specific term, Coase indeed discussed costs of using the price mechanism in his 1937 paper, The Nature of the Firm, where he first discusses the concept of transaction costs, and refers to the “Costs of Market Transactions” in his seminal work, The Problem of Social Cost (1960). The term “Transaction Costs” itself can instead be traced back to the monetary economics literature of the 1950s, and does not appear to have been consciously ‘coined’ by any particular individual (Kissell and Glantz, 2003).

Transaction costs are not only the obvious cases of buying and selling, but also day-to-day emotional interactions, informal gift exchanges, etc. According to Williamson (2001), the determinants of transaction costs are frequency, specificity, uncertainty, limited rationality, and opportunistic behavior. At least two definitions of the phrase “transaction cost” are commonly used in literature. Transaction costs have been broadly defined by Cheung (2007) as any costs that are not conceivable in a Robinson Crusoe economy. In other words, it can be defined as any costs that arise due to the existence of institutions. For Cheung (2007), if the term transaction costs were not already so popular in economics literatures, they should more properly be called institutional costs (Cheung, 2007). But many economists seem to restrict the definition to exclude costs internal to an organization (Demsetz, 2003). The latter definition parallels Coase’s early analysis of “costs of the price mechanism” and the origins of the term as a market trading fee that can determine economic development.

For the purpose of economic development, it is important to understand the kind of institutions and factors (firms, markets, franchises, etc.) that minimize the transaction costs of producing and distributing a particular good or service. Often these relationships are categorized by the kind of contract involved. Amount of transaction cost is dependent on the type of contract involved.

1.2       STATEMENT OF THE PROBLEM

From time immemorial, the impact of transaction costs on economic development was limited to an acknowledgement of their influence on the decisions of firms between market and internal procurement (Coase, 1937). Nowadays, theoretical and empirical studies suggest that transaction costs are critical in explaining not only the organizational structure of firms, but the composition of industries and market emergence and functioning. As a result, they are present not only in the industrial organization or economics of the firm literature but in the development economics literature as well. Nevertheless, there seems to be significant differences between how transaction costs have been assessed depending on the assumptions made about the degree of economic development in which firms are circumscribed. Hence, the need for this study on transaction costs and economic development in Nigeria.

1.3       OBJECTIVES OF THE STUDY

1. To examine the relationship between the transaction costs and economic development in Nigeria.
2. To determine the impact of transaction costs on economic development of Nigeria.
3. To analyze the factors influencing transaction cost in Nigeria.

1.4       RESEARCH QUESTIONS

1. What is the relationship between the transaction costs and economic development in Nigeria?
2. What is the impact of transaction costs on economic development of Nigeria?
3. What are the factors influencing transaction costs in Nigeria?

1.5       HYPOTHESIS

HO: there is no significant relationship between the transaction costs and economic development in Nigeria

HA: there is significant relationship between the transaction costs and economic development in Nigeria

1.6       SIGNIFICANCE OF THE STUDY

The following are the significance of this study:

1. The results from this study will educate the entrepreneurs and financial policy makers in Nigeria and the general public on the role of transaction costs and an effective tool in enhancing economic development in Nigeria.
2. This research will be a contribution to the body of literature in the area of the transaction costs and economic development in Nigeria, thereby constituting the empirical literature for future research in the subject area.

1.7       SCOPE/LIMITATIONS OF THE STUDY

This study is limited to the manufacturing sector of the Nigeria economy. It will also cover the relationship between transaction costs and economic development in Nigeria.