The Transaction Costs Perspective on Standards as a Source of Trade and Productivity Growth

Frank A.G. den Butter, Vrije Universiteit Amsterdam - Economics, Stefan Groot, Free University of Amsterdam, and Faroek Lazrak, Free University of Amsterdam

5/23/2008
(Original Publish Date: 11/1/2007)

This paper discusses the design, implementation and use of standards from the perspective of transaction costs economics. A proper design and implementation of standards may lead to a considerable reduction of transaction costs, which enhances trade and, consequently, economic welfare. A major example is the use of containers, which has drastically changed the worldwide transport infrastructure, and lowered the costs of transport of goods considerably. The example of containers also shows that network externalities play a major role in the use of standards, and that, on the other hand, worldwide standards with large sunk investment costs may lead to a lock-in. This may call for government intervention in the design and use of standards, and in the transition processes to new standards. The paper provides ample further examples of standards and on the role of the government, or clubs, with respect to these standards.