How Economic Freedom Affects Transaction Costs

Abstract

The effects of economic liberalization have been subject to academic and political discussion for many decades. The trade war between the United States and China brought new perspectives to this debate and raised the question: do fewer trade barriers and more economic freedom lead to better functioning societies? Following the perspective of the transaction cost theory, we argue that more economic freedom reduces non-productive expenses and allows private companies to improve the allocation of resources. It also allows more competition among companies, which facilitates access to funding. In this research, we use data of 1,248 publicly traded companies in the seven largest Latin American countries to analyze the effect OF increasing economic freedom on administrative expenses and financial. Our results indicate that, on average, increasing economic freedom allows the reduction of transaction costs and facilitates financial leverage for companies.