ABSTRACT
This chapter provides the basic concepts of institutions and transaction costs and their relationship. It considers the dynamics of small industry and its linkages with the institutional framework; and outlines the threads together. The concept of transaction costs follows from the non-existence of the perfect markets typical of neo-classical economics. The costs of transacting arise because information is costly and asymmetrically held by the parties to the exchange and also because the manner in which the actors develop institutions to structure human interaction results in some degree of imperfection of markets. Explaining the effects of firm size on transaction costs, Nooteboom shows that transaction costs are bound to be higher for the smaller firm, in its role as buyer and as seller, but also for the transaction partners. In general the factors causing high transaction costs to small firms are: information bottlenecks; unfavourable policy environment; and the nature of the small business activity.
