In praise of transaction costs

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I was at an ODI conference last week talking about The Market for Aid. A common response: these ideas of competition, rigorous evaluation and accountability through output-based aid are all very well, but the transaction costs are enormous.

My response: if the result is aid which is targeted at the most deserving recipients in the highest-value uses with the minimum waste and corruption, let the transaction costs multiply. Transaction costs are a necessary part of the modern economy - Douglass North and John Wallis estimated that they doubled in the USA between 1870 and 1970, and are now more than half of GDP.

The mailman, accountant, secretary, judge, union official, manager, foreman and web designer? Transaction costs, my friend. They're worth it.

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