ICT Policy for Agriculture Based on a Transaction Cost Approach: Some Lessons from Sri Lanka

2.0 Defining Transaction Costs: Information Search Costs

Given the objective of ICT in agriculture is to reduce transaction costs for farmers it is imperative that transactions costs are understood and well defined. Interestingly however, as Singh (2008) points out, there is no standard definition of the term, and traditionally, transaction costs have broadly been interpreted as costs associated with market exchange. In the vast literature on the subject starting from the seminal work of Coarse (1937) to the recent work by Aker (2008) several specific definitions have been used. In this paper we use the definition suggested by Staal et al. (1997) where transaction costs in an economic exchange are classified into observable and unobservable costs beyond the actual cost of the product or service being exchanged. In the case of agriculture markets observable transaction costs would include tangible (and proportional) costs such as transport, handling, packaging, storage, spoilage etc. that are visible when an economic exchange takes place. Unobservable transaction costs, on the other hand, would include intangible (and mostly fixed) costs such as cost of information search, bargaining and enforcement of contracts etc. From an ICT perspective it is really the cost of information search; a subset of total transaction costs, that can potentially be reduced through the adoption of ICT.