ECO320H1 Lecture Notes - Lecture 5: Transaction Cost, Liquidated Damages, Specific Performance
Document Summary
Theorem of coase: when transaction costs are zero (0), an efficient (socially optimal) use of resources results from private bargaining, regardless of the legal assignment of property rights. Transaction costs are the costs of a bargain or exchange: transaction costs derive from three (3) sources: search costs (looking for the appropriate contract) document costs (legal fees in drafting agreements) . This doesn"t mean people aren"t rational, they make the best decision with the information they have. Single moral hazard: the principal cannot observe the effort or action applied by the agent. This means the principal cannot know in advance whether or not the contract will be performed by the agent. Double moral hazard: neither agent nor principal cannot observe the effort or action applied by the other. This means the parties cannot know in advance whether or not the contract will be performed.
