Measuring the Influence of Information Networks on Transaction Costs Using a Non-parametric Regression Technique

All business transactions as well as achieving innovations take up resources, subsumed under the concept of transaction costs (TAC). One of the major factors in TAC theory is information. Information networks can catalyse the interpersonal information exchange and hence, increase the access to nonpublic information. Our analysis shows that information networks have an impact on the level of TAC. Many resources that are sacrificed for TAC are inputs that also enter the technical production process. As most production data do not separate between these two usages of inputs, high transaction costs are unveiled by reduced productivity. A cross-validated local linear non-parametric regression shows that good information networks increase the productivity of farms. A bootstrapping procedure confirms that this result is statistically significant. 1 Transaction Costs and Social Networks Traditional neoclassical economics assumes that the exchange of goods is costless so that—in this respect—markets are efficient and always provide goods at the lowest possible price. However, more than 70 years ago, Coase (1937) argued in his essay “The Nature of the Firm” that market transactions often involve higher costs than just the market price. Other costs (e.g. search and information costs, bargaining costs, and policing and enforcement costs) can increase the costs of procuring something from a market. His theory became manifest in the concept of transaction costs, which has become a major field in institutional economics especially during the past 30 years. Transaction costs can be divided into two main categories: technological transaction costs and institutional transaction costs (Green and Sheshinski, 1975). Both technological and institutional transaction costs refer to the sacrifice of resources. Furthermore, institutional transaction costs include search, negotiation, and control costs, while technological transaction costs can be divided into innovation transaction costs and physical transportation costs. Institutional transaction costs can occur in three different stages of the transaction: i) contact phase, ii) contracting phase, and iii) control phase (den Butter and Mosch, 2003). In the contact phase of a potential transaction, the actor is looking for information on potential trade partners (buyers or sellers), information on non-observable quality characteristics of his preferred product, and prices of the product (either seller or buyer prices). These searching costs occur because the search for information is not free, nor is information always complete, reliable, or easily accessible. Akerlof (1970) shows in his classical lemons problem that information asymmetry can be so severe and access to reliable information so costly and difficult that a market collapses. Searching costs are reduced if information is more easily accessible. Well functioning information networks can provide their members with information on business opportunities by giving cheap access to the above mentioned informations (Granovetter, 1983; Dekker, 2001; Henning and Zuckerman, 2006). As a further benefit, they increase the reliability of the information. In fact, with more information available in the network, and with easier transfers to all interested members, the probability that the information is of high quality increases, i.e. the information can be trusted to be relevant and true (Casson, 1997; Fafchamps, 2001). Based on the theory of weak ties (Granovetter, 1973), Montgomery (1992) demonstrates that weak ties are positively related to higher wages and higher aggregate employment rates. Actors with many loose ties (gatekeeper) are superior in the access to reliable information on market opportunities and perform better on the market. The contract phase starts when two trade partners agree upon making a deal. Transaction costs in this phase are mainly negotiation costs. Both partners have to agree on how to divide potential rents from trade, i.e. negotiation of trading conditions (Braun and Gautschi, 2000). Because of