Institutional Transition And Transition Cost: A Methodological Consideration

This paper attempts to explain why institutional changes, whose direction look obvious at the beginning, arouse controversies and, more often than not, face ‘setbacks’. It starts from critically assessing North’s (1981; 1990) analysis of relating transaction cost and economic performance and argues for considering ‘transition cost’, separately from transaction cost, in designing institutional change. The ‘reformers’ are often interested in possible transaction cost reducing effect of institutional transition. But an institutional transition can be justified only if the reduction in transaction cost more than compensates for transition cost involved. It seems that many institutional reforms face problems because they ignore or underestimate the aspect of transition cost, the size of which is specific to institutions concerned.