Transaction Costs and the Normative Elements of the Public Choice Model: An Application to Constitutional Theory

Abstract

In the wake of the Coase Theorem, transaction costs have come to play the pivotal role in economic discourse as it relates to legal issues. The Coase Theorem posits that, absent transaction costs, the efficient outcome will occur regardless of the choice of legal rule. In a wide variety of contexts, therefore, the quest to formulate efficient rules focuses on the nature of the transaction costs that hamper the parties' ability to contract effectively among themselves. This essay presents a model of the role that transaction costs play in the economic theory of legislation. By emphasizing the role of transaction costs in the "public choice" model, this exercise seeks to develop a normative argument about how constitutional rules in a "rent-seeking" society can increase societal wealth and improve the quality of a representative democracy.