A Theoretical and Empirical Analysis of Economic Freedom Effect on Transaction Cost in the Selected Case Study: OECD Countries

Abstract

Some economists believe that Economies with the higher degree of economic freedom have a better performance than that of planned economies. This group has ranked countries by various indexes of economic freedom to show how to have access to the world resources. In the literature, there is an emphasize on the relationship between economic freedom and transaction cost. This reveals the fact that economic freedom followed by free competition, property rights and voluntarily exchanges can decrease transaction cost in the markets, through the reduction in limits. The goal of this paper is to construct a theoretical framework to discuss the effect of economic freedom on transaction cost. Then, it uses data OECD high income members over 1995-2004. The empirical results indicate that the selected countries are not only affected by economic freedom by indexes transaction cost consist: (voice and accountability, government effectiveness, control of corruption, regulatory construction and corruption index) while the effect is U shape and convex, that is, an increase in economic freedom results in a decrease in transaction cost but in the process of economic increasing freedom transaction cost rises.