CHAPTER ONE

INTRODUCTION

1.1       BACKGROUND TO THE STUDY

Economic development of countries is shaped by the way they evolved. Although, transaction and production cost is determined by their level of technological advancement and industrialization. In this light, this study is examining the relationship between the transaction costs and economic development in Nigeria.

A transaction cost is a cost incurred in making an economic exchange of some sort, or in other words the cost of participating in a market. Transaction costs can be divided into search and information costs, bargaining costs and policing and enforcement costs (Klaes, 2008). Search and information costs are costs such as in determining that the required good is available on the market, which has the lowest price, etc. Bargaining costs are the costs required to come to an acceptable agreement with the other party to the transaction, drawing up an appropriate contract and so on. On asset markets and in market microstructure, the transaction cost is some function of the distance between the bid and ask. Policing and enforcement costs are the costs of making sure the other party sticks to the terms of the contract, and taking appropriate action (often through the legal system) if this turns out not to be the case. For example, the buyer of a used car faces a variety of different transaction costs. The search costs are the costs of finding a car and determining the car’s condition. The bargaining costs are the costs of negotiating a price with the seller. The policing and enforcement costs are the costs of ensuring that the seller delivers the car in the promised condition (Dahlman, 2009).