One of the primary agendas of the liberalization which began in 1991 was to improve competitiveness and reduce the transaction costs which largely restricted India’s trade with the rest of the world. But a quarter century after economic reforms were initiated, this Coasean problem of transaction costs remains more relevant than ever. The World Bank’s latest World Development Report, or WDR, points to the potential of Internet and communication technology (ICT) in pruning these.
The Coase theorem (named after British economist Ronald Coase) states that if trade in an externality is possible and there are sufficiently low transaction costs, bargaining will lead to an efficient outcome regardless of the initial allocation of property. Since the digital revolution, the virtual world has increased the possibilities of trade in the real world, minimizing these transaction costs. Transaction costs include search and information costs, bargaining and decision costs, and policing and enforcement costs.