The Making of Economic Policy. A Transition Cost Politics Perspective
MIT Press, Cambridge, MA, London, 1996
CES Munich Lecture Series
The Making of Economic Policy begins by observing that most
countries' trade policies are so blatantly contrary to all the
prescriptions of the economist that there is no way to
understand this discrepancy except by delving into the politics.
The same is true for many other dimensions of economic policy. Avinash Dixit looks for an improved understanding of the politics
of economic policymaking from a transaction cost perspective.
Such costs of planning, implementing, and monitoring an
exchange have proved critical to explaining many phenomena in
industrial organization. Dixit discusses the variety of similar
transaction costs encountered in the political process of making
economic policy and how these costs affect the operation of
different institutions and policies.Dixit organizes a burgeoning body of research in political economy in this framework. He uses U.S.
fiscal policy and the General Agreement on Tariffs and Trade (GATT) as two examples that illustrate
the framework, and show how policy often deviates from the economist's ideal of efficiency. The
approach reveals, however, that some seemingly inefficient practices are quite credible attempts to
cope with transaction costs such as opportunism and asymmetric information.
"This work is a tour de force of the kind we have come to expect from Avinash Dixit. Using the basic
ideas of transactions cost theory, he simultaneously analyzes much of current literature and provides
his own insights in to the theory of economic policy formulation. The work is sure to be a standard
reference in the burgeoning field of political economy." - Anne O. Krueger, Professor of Economics,
Stanford University.