Foranyresource,anumberofindividualspeteforownership.Eachpotentialbuyeroruserpossessessomeknowledgenotonlyofalternativeusesoftheresource,butalsoofdifferenttransactioncostsassociatedwithdifferentarrangementsbywhichtheresourcemayenterintoproduction.Assumeawayinformationproblemsthatmayexistinpetitivetradinginthemarketplace;[6]theresourcewillfindthatownerwhoseuseoftheresourceyieldsthehighestvalue.orgpetitionforandtransferabilityoftheownershiprightinthemarketplacethusperformtwomainfunctionsforcontracting.First,petitionconglomeratesknowledgefromallpotentialowners-theknowledgeofalternativecontractualarrangementsandusesoftheresource;andtransferabilityofpropertyrightsensuresthatthemostvaluableknowledgewillbeutilized.Second,petitionamongpotentialcontractparticipantsandaresourceowner'sabilitytotransfertherighttousehisresourcereducethecostofenforcingthestipu-latedtermsinacontract.Thisisbecausepetingpartieswillstandbytoofferoracceptsimilarterms.Insum,petitioninthemarketplacereducesthecostsoffindingandpursuingthemostvaluableoptioninwhicharesourcemaybecontractedforproduction.Whiletransactioncostdetermines,itisalsodetermined.
Intheabsenceoftransactioncosts,thatstateofresourceallocationunderwhichitisnolongerpossibletoreallocateresourcestobenefitoneindividualwithoutanother'slosing（thatis,theParetocondition）impliesthefamiliarsetofmarginalequali-tiesinresourceuse.Withtransactioncostsincluded,however,resourceallocationinconformitywiththeParetoconditionneednotsatisfythesamesetofmarginalequalities.[7]Althoughitisdifficult,ifnotimpossible,toseparateonetypeoftransactioncostfromanother,itmaynonethelessbeusefultodistinguishtwotypesofmarginalinequalitiesgeneratedbythepresenceoftransactioncosts.
Thefirstmayberegardedasbeingamongfirms;thatis,thesamefactorinputyieldsdifferentmarginalproductivitiesindifferentfirmsorindifferentuses.Forexample,withtransactioncoststheremaynotexistauniformfactorpriceinthemarket,andthebuyer'spricemaydifferfromtheseller'sprice.Thesepricedifferentialswillleadtodifferentmarginalproductivitiesofthesamefactorinputindifferentfirms.Totheextentthattransactioncostsaresohighastoprohibittransfersofresourcerights,theresourcevaluecanonlybeexpressedintermsofanonpecuniarymeasure.
Asecondtypeofmarginalinequalitymayberegardedasbeingwithinthefirm;thatis,themarginalproductofafactoremployedbyafirmmaydivergefromitsmarginalfactorcostowingtotransactioncosts.Letmeclarifythis.Consideracontractinvolvingalump-sumpaymentfortheuseofaresource,whereinthequantityoftheresourceisnotstipulatedatall.Forexample,alandowner,inlettinghisscarcewaterresourcetoatenant,maychargeonlyaflatfeeandallowthetenanttousethequantityofwaterfreely.Thisarrangementischosenbecausethetransactionorenforcementcostofquantification（throughmeteringorotherdevices）issohigh（owingto,say,thephysicalattributesofwater）astomakealternativearrangementsinefficient.[8]Underthisformofcontractualpayment,thewaterresourcewillbeusedbythetenantuntilitsmarginalproductiszero,eventhoughthemarginalfactorcostofthewaterispositive.Butifthemarginalinequalityofresourceuseisduetodifferentcostsofcontracting,itdoesnotimplyinefficientresourceuse.Indeed,ifthegainfromchoosinganothercontractualarrangement（e.g.,acontractwithaunitpricechargedonwater）hadbeengreaterthanthecostofquantifyingtheuseofwater,somemeteringdevicewouldhavebeenadoptedandthecontractwiththelump-sumpaymentabandoned.[9]
Efficientallocation,therefore,requiresthateachresourcebeusedinthehighest-valuedoptionsubjecttotheaddedconstraintoftransactioncosts.Theoptionvaluemaybemeasuredinutilityorinwealth,dependingontheexistenceofmarketprices.Butsincetransactioncostsmayalsodependonalternativelegalarrangements,the"highest-valuedoption"isnotalwaysclear.Ishalltrytosaymoreonthisintheconcludingsectionofthischapter.
Theexistenceoftransactioncostsappearstohaveatleastthreepredictableeffects.First,theytendtoreducethevolumeoftransactions,thusimpairingeconomicspecializationinproductionandtheemploymentofresources.Second,theymayaffectmarginalequalities（andintensities）ofresourceuse.Andthird,theywillaffectthechoiceofcontractualarrangements.Thelastisourmainconcernhere.
A.TheChoiceofContractsinAgriculture
Considerthethreemainformsofcontractsinagriculture;namely,afixed-rentcontract（rentperacrestatedincashorincrop）,asharecontract,andawagecontract.Underprivatepropertyrights,thecontractingpartiesarefreetochooseamongtheseforms.Theobservedpatternsofcontractualchoicesvaryfromplacetoplace.Forexample,sharecontractsweremorefrequentthanfixedrentsinTaiwanandSoutheastAsiabeforetheagrarianreforms;inChinafixedrentsweremorefrequentthansharerentsinthe1930s;inJapan,fixedrentspredominated;andingeneral,wagecontracts（farmhands）havebeeninfrequent,oc-curinginabout1to5percentofthefarminghouseholdsinvariouslocalities.[10]Whydothepatternsofcontractualchoicesdiffer?Whatdeterminesthechoiceofcontracts?