Where Do Transactions Come From? A Network Design Perspective on the Theory of the Firm

Our goal in this paper is to explain the location of transactions (and contracts) in a larger system of production. We first characterize the system as a network of tasks and transfers. While transfers between agents are necessary and ubiquitous, the mundane transaction costos of standardizing, counting, valuing and paying for what is transferred make it impossible for all transfers to be transactions. We go on to argue that the modular structure of the network determines its pattern of mundane transction costs, and thus establishes where cost-effective transactions can be located.

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