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ZEF Discussion Papers on Devlopment Policy 7
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Bog'liq zef dp07ZEF Discussion Papers on Devlopment Policy 7
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If transaction costs are very high, i.e.,
G
≥
a – c
, then there is no market participation, and
the market fails. As has been pointed out by several authors (see for example Leff, 1984), two
key elements that determine the emergence of markets are the costs associated with acquiring
information and the cost of negotiating transactions. The spread of ICTs is expected to lead to a
reduction in these very costs and accordingly may be expected to exert a positive influence on
the emergence of markets.
Thus, two effects may be noted. If markets already exist, then by reducing transactions
costs, the spread of ICTs may generate increased market activity. In other words, a narrowing of
the price gap (
G
) may be expected to result in an increase in the equilibrium quantity transacted.
Second, by reducing two key prices, the presence of ICTs may be expected to lower the
threshold that needs to be overcome for markets to emerge.
3.3 Institutional change
16
Another tenet of the information-theoretic approach is that many of the special
institutional features observed in LDCs have emerged in response to the informational
constraints and high transactions costs which pervade these countries.
17
These institutions may
thus be regarded as endogenous, and it may be expected that a change in the underlying
environment that fosters these institutions will facilitate institutional changes that are more
conducive to development.
In this respect, ICTs may provide the impetus for institutional change in two ways. First,
the reduction in transaction costs associated with the spread of ICTs may provide the exogenous
forces required to create an institutional disequilibrium. This disequilibrium (from the demand
or the supply side) could render an existing institutional arrangement less efficient than others in
the choice set and provide the impetus required for institutional change. For instance, a
phenomenon often observed in third-world agriculture is inter-linked agricultural contracts. In
these contracts, the agent is dependent on the principal for several inputs such as land, credit and
insurance. While these relationships may reduce aggregate transaction costs, an ICT-induced
expansion of markets may reduce the need for such patron-client relationships. Similarly, a
reduction in transaction costs and the spread of credit markets may increase the supply of bank
credit and reduce the need for the proverbial village money-lender, or the spread of product
markets and enhanced information flows may reduce the need for middle-men in the marketing
of agricultural produce.
16
While the term ‘institution’ may be used in a variety of ways, for the purpose of this survey, a definition
borrowed from Lin and Nugent (1995) may be useful. According to them, an institution is defined as a set of
humanly devised behavioral rules that govern and shape the interaction of human beings.
17
For instance, share-cropping may be viewed as a rational response to an incentive problem caused by
informational imperfections and a risk problem caused by the absence of insurance markets.
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