Transactions Costs, Technological Choice, and Endogenous Growth

Abstract

Hicks ("A Theory of Economic History," Clarendon Press Oxford, 1969) argues that an important aspect of industrial development is the adoption of technologies requiring highly illiquid capital investments. The adoption of such technologies becomes economically viable in the presence of low-cost financial markets that provide liquidity to investors. This observation provides a mechanism by which the costs of transacting in financial markets affect the equilibrium choice of technology, productive efficiency, and, by implication, growth. We analyze how the costs of financial market transactions affect the set of technologies in use and the equilibrium growth rate. Transactions cost reductions may, depending on the capital structure, enhance or reduce growth. Journal of Economic Literature Classification Numbers: D90, E13, G14.