Transaction Costs, Risk Aversion, and the Choice of Contractual Arrangements

Publisher Summary This chapter discusses transaction costs, risk aversion, and the choice of contractual arrangements. Every transaction involves a contract, and the transactions conducted in the marketplace entail outright or partial transfers of property rights among individual contracting parties. The contractual arrangements through which these transfers are negotiated are several and varied. The chapter presents a theory that states that economic efficiency is the same under various land tenure arrangements subject to the constraint of private property rights. Although transaction costs exist in the real world, the theory enables the understanding of much of the farming behavior. However, the presence of a variety of contractual arrangements under the same constraint of competition poses the question of the choice of these arrangements. If a firm can increase efficiency in production by employing productive resources of more than one resource owner, a contract to combine the resources will be obtained. The formation of the contract involves partial transfers of property rights in one form or another, such as leasing, hiring, or mortgaging.