Transaction Costs, Convergence and Gains from Trade: Evidence from Japan

Abstract

Transaction costs are among the most important explanatory variables for institutional economics. Starting from Ronald Coase as the pioneer then North, Wallis, Williamson and many other economists have been pointing to this. Institutional quality can be measured by the rule of law index and government effectiveness; however, the impacts on the economy as spillover effects are the other crucial points which needed to be studied. Besides these, how are these transaction costs created? What kind of sources are they coming from? In order to explain these questions, understanding institutional change is vital. Yet, this may not be enough to explain where this institutional change is coming from. Are countries experiencing modernization and if so, how? Do countries affect each other so that they are becoming similar? What is the cost of this unity? How will this unity be achieved by these countries? To answer these additional questions, one should start from international trade. The neoclassical international trade theory suggests that countries converge on each other as they trade goods and services. Also, as trade volume increases, we expect to have more consumption and production and some other benefits which lead to an increase in the utility level of representative households. The rate of convergence depends on countries’ bargaining power. Therefore, countries force their trade partners to cause institutional changes. According to the Walrasian world, transaction costs are assumed to be zero since we have perfect markets. However, in the real world we have uncertainty, and information is not costless. Thus, people encounter these transaction costs as stated by Coase and many others. All in all, considering trade, institutional change and transaction costs together will provide the net benefits from trade. As evidenced by Japan, the path of institutional change is coming from Western influences. These influences started in Japan increasing the international trade volume in the Meiji Era. Consequently, the main purpose of this dissertation is to bring together all the crucial points stated above, and then find the net gains from trade. This unique idea fills the gap in the literature.