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The Role of ICT in Economic Development – A Partial Survey
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Bog'liq zef dp07The Role of ICT in Economic Development – A Partial Survey
10
Consider a market with inverse demand and supply functions:
Q
b
a
P
−
=
+
(1)
,
dQ
c
P
+
=
−
(2)
where
Q
is quantity,
P
+
is the price paid by the buyer, and
P
--
is the price received by the seller.
The price gap (
G
=
P
+
-
P
--
) between the buying and the selling price may be defined as the
transaction cost.
15
Equilibrium in this market is defined by:
.
)
(
,
)
(
,
*
d
b
bc
d
G
a
P
d
b
G
c
b
ad
P
d
b
G
c
a
Q
+
+
−
=
+
+
+
=
+
−
−
=
−
+
(3)
As noted before and as shown in (3), a key drawback associated with information
deficiency is that it limits the extent of trade and hampers the functioning of markets. In such an
environment, a reduction in the cost of acquiring information should lead to an increase in search
activity and an increase in the quantity and quality of information that is used prior to decision-
making. These increased information flows should, in turn, lead to a reduction in market
uncertainty and encourage increased participation in factor and product markets. This effect may
be readily seen from the comparative statics (
)
0
*
<
∂
∂
G
Q
, i.e., a reduction in transaction costs
leads to an increase in equilibrium quantity. Note that increased participation in product markets
is not restricted to local or national markets. The reduction in transaction costs may make it
easier for firms to sell their products nationally and internationally. This feature also applies to
factor markets. For instance, as Leff (1984) notes, enhanced information flows and reduced
uncertainty may open up new investment opportunities and increase the flow of domestic and
international capital.
The impact of readily available and current information may actually be more far-
reaching. In many developing countries, the existence of markets can not be taken for granted.
For instance, the high degree of self-sufficiency in LDC agriculture seems to indicate that high
transaction and information costs may be precluding the emergence of (factor and product)
markets. In the framework used here, this feature is readily discernible.
15
Several authors have expressed skepticism over the invocation of transaction costs as a means of explaining
economic phenomena. Goldberg (1985) points out that appealing to transaction costs as a way of explaining
economic phenomena is the all-encompassing answer that tells us nothing. While noting that information costs are
an important part of transaction costs, Stiglitz (1989) adopts an information approach citing the lack of specificity of
the transaction-costs approach as its main drawback. To avoid these criticisms, here transaction costs are defined on
the basis of the simple demand-supply framework used above (see Hirshleifer, 1973; Norton, 1992).
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