Theoretical Framework of Low Income Earners

Topics: Transaction cost, Ronald Coase, Economics Pages: 2 (376 words) Published: March 3, 2013
Theoretical framework

Ronald Coase’s article “The Problem of Social Cost”: to carry out a market transaction it is necessary to discover who it is that one wishes to deal with, to conduct negotiations leading up to a bargain, to draw up the contract, to undertake the inspection needed to make sure that the terms of the contract are being observed.

This theory is related to our study because there were negotiations involved between two parties which are the lender and borrower and the transaction cost can be conceptualized as a non financial cost incurred in credit delivery by the borrower and the lender before, during and after the disbursement of loan.

If there were no such things as the costs of doing a transaction, legal rules would be irrelevant to the maximization of production. Because in the real world there are costs of bargaining and information gathering, legal rules are justified to the extent of their ability to allocate rights to the most efficient right-bearer. Shows how bargaining and assignment of property rights can alleviate the problem of externalities without the need for government intervention in the form of taxes or subsidies. Coase's explanation is that there are "transaction costs" associated with going to a market for everything a business needs- clearly, it would be inefficient to have to engage in a market transaction every time a manager needs an assistant to write an email, for example- and that these transaction costs are reduced when an employee is hired into a company simply because the company is essentially purchasing the right to decide on the fly what it wants to the employee to do. It states that “if trade in an externality is possible and there are no transaction costs, bargaining will lead to an efficient outcome regardless of the initial allocation of property rights.”

Business is a math problem and companies need to understand not just the price – but the total cost, including the nebulous “transaction”...
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