The paper examines the impact of transaction costs on institutional development and
agricultural productivity in Nepal and analyzes the factors influencing transaction costs. A
field survey of in the Kathmandu and Palpa districts of Nepal, reveals that transaction costs
amount to 3 %of the net farm return and 3.3 % of the total cost of production. It is rational for
farmers to invest in ensuring reliable irrigation and better institutional management because
farmers with reliable irrigation and better institution reported higher productivity