Transaction costs, exit, and democracy

“What is important to note, however, is that transaction costs associated with relocation matter. The relative success of protectionist and subsidyseeking groups in post-war Britain, Australia, and New Zealand was facilitated by the high costs associated with exercising the exit option. Both Britain and New Zealand are unitary and centralized nation states. Although Australia is a federation, there are only six states, each of which has less fiscal and regulatory autonomy than American states or Canadian provinces.

Polycentric democracy works most effectively when exit-related transaction costs are low and when the number of viable options is large. The closest approximations of a genuine polycentric democracy are the 50 American states and the 26 Swiss cantons.”

Read the rest (pdf). (Yes, I know this was part of last night’s “nightcap,” too.)