Welfare gains by reducing transaction costs: Linking trade and innovation policy

Joost Baeten and Frank A.G. den Butter
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Joost Baeten: Vrije Universiteit Amsterdam, Faculteit der Economische Wetenschappen en Econometrie (Free University Amsterdam, Faculty of Economics Sciences, Business Administration and Economitrics

No 12, Serie Research Memoranda from VU University Amsterdam, Faculty of Economics, Business Administration and Econometrics

Abstract: Specialisation and trade are major sources of productivity increases, and therefore of welfare gains. With reference to the Netherlands this paper discusses how (international) fragmentation of production and outsourcing may enhance productivity. In order to promote further specialisation and trade, innovations which lead to lower transaction costs - trade innovations - are needed. When trading countries, which are likely to have a comparative advantage in reducing transaction costs, focus on the coordination function in the production chain, they are able to internalize part of the welfare gains from increased trade. Infrastructure and knowledge investments that reduce transaction costs, the so called trade capital, partly have the character of a public good. Moreover, trade innovations bring about positive externalities, which is another reason for government intervention and for linking trade and innovation policy. From this perspective the paper gives some policy recommendations.

Keywords: Outsourcing; transaction costs; Knowledge spill-overs; Trade policy; Innovations; Coordination function (search for similar items in EconPapers)
JEL-codes: D23 F10 K12 Z13 (search for similar items in EconPapers)
Date: 2006
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Citations: View citations in EconPapers (2)

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