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The Efficient Scope of Private Transactions-Cost-Reducing Institutions: The Successes and Failures of Commodity Exchanges

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  • Pirrong, Stephen Craig

Abstract

Commodity exchanges historically have served as private organizations that govern contractual relations between market participants. Their functions have included commodity measurement, contract enforcement, the policing of theft and fraud, and the mitigation of information asymmetries. In contrast to these successes, the Chicago Board of Trade failed signally in its attempt to introduce a grain grading system after the Civil War. This effort failed because (1) the proposed reform imposed significant costs on interests whose cooperation was essential to its success and (2) the transactions costs of reaching an agreement to compensate these interests for their losses under the efficient property rights were prohibitive. A comparison of the successes and failures of commodity exchanges reveals that exchanges succeed when the benefits of exchange governance are symmetric and fail when the costs and benefits are extremely asymmetric. Copyright 1995 by the University of Chicago.

Suggested Citation

  • Pirrong, Stephen Craig, 1995. "The Efficient Scope of Private Transactions-Cost-Reducing Institutions: The Successes and Failures of Commodity Exchanges," The Journal of Legal Studies, University of Chicago Press, vol. 24(1), pages 229-255, January.
    • Handle: RePEc:ucp:jlstud:v:24:y:1995:i:1:p:229-55
    DOI: 10.1086/467959
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    Cited by:

    1. Pirrong, Craig, 2000. "A Theory of Financial Exchange Organization," Journal of Law and Economics, University of Chicago Press, vol. 43(2), pages 437-471, October.
    2. Brousseau, Eric & Raynaud, Emmanuel, 2011. "“Climbing the hierarchical ladders of rules”: A life-cycle theory of institutional evolution," Journal of Economic Behavior & Organization, Elsevier, vol. 79(1), pages 65-79.
    3. Allen, Franklin & Qian, Jun & Zhang, Chenying, 2011. "An Alternative View on Law, Institutions, Finance and Growth," Working Papers 11-64, University of Pennsylvania, Wharton School, Weiss Center.
    4. Velkar, Aashish, 2010. "‘Deep’ integration of 19th century grain markets: coordination and standardisation in a global value chain," Economic History Working Papers 28988, London School of Economics and Political Science, Department of Economic History.
    5. Daniel P. Kessler & Daniel L. Rubinfeld, 2004. "Empirical Study of the Civil Justice System," NBER Working Papers 10825, National Bureau of Economic Research, Inc.
    6. Brousseau, Eric & Garrouste, Pierre & Raynaud, Emmanuel, 2011. "Institutional changes: Alternative theories and consequences for institutional design," Journal of Economic Behavior & Organization, Elsevier, vol. 79(1-2), pages 3-19, June.
    7. Annie Royer, 2008. "The Emergence of Agricultural Marketing Boards Revisited: A Case Study in Canada," Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie, Canadian Agricultural Economics Society/Societe canadienne d'agroeconomie, vol. 56(4), pages 509-522, December.
    8. Steen Thomsen & Frederik Vinten, 2014. "Delistings and the costs of governance: a study of European stock exchanges 1996–2004," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 18(3), pages 793-833, August.
    9. Bürgi Bonanomi, Elisabeth & Elsig, Manfred & Espa, Ilaria, 2015. "The Commodity Sector and Related Governance Challenges from a Sustainable Development Perspective: The Example of Switzerland Current Research Gaps," Papers 865, World Trade Institute.
    10. Ruiqing Miao & David A. Hennessy, 2015. "Optimal Protein Segregation Strategies for Wheat Growers," Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie, Canadian Agricultural Economics Society/Societe canadienne d'agroeconomie, vol. 63(3), pages 309-331, September.

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