Behaving ethically can reduce transaction costs through the reputation effect.

Question

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When an individual or a firm behaves ethically, it earns a good reputation. The reputation effect reduces transaction costs by making it easier for the individual or the firm to engage in future transactions, as other parties are more likely to trust and cooperate with it. This can result in fewer negotiations, lower monitoring costs, and more efficient exchanges, leading to overall cost savings.

Behaving Ethically Can Reduce Transaction Costs Through the Reputation Effect