Where do transactions come from?

Our goal in this paper is to explain the location of transactions (and contracts) in a system of production. Systems of production are engineered systems, and where to place "transactions" characterizing a system of production as a network of tasks that agents perform and transfers of material, energy and information between and among agents. We then argue that whereas transfers between agents are absolutely necessary and ubiquitous in any human-built system of production, transaction costs make it impossible for all transfers to be transactions. The particular transaction costs we are concerned with are the so-called �mundane� costs of creating a transactional interface: the costs of defining what is to be transferred, of counting the transfers, and of valuing and paying for the individual transfers. We go on to argue that the modularity of a system of production determines the system�s pattern of mundane transaction costs. In this fashion, the engineering design of a system of production necessarily establishes (1) where transactions can go; and (2) what types of transactions are feasible and cost-effective in a given location.