An important application of transaction cost analysis is to provide a framework for analyzing contractual choices. For example, consider an agrarian setting in which there are only two inputs, land and labor .first, assume that land and labor are equally distributed among all households in a community. There are two possible institutional arrangements : either each household produces independently , or all households pool their resource and produce collectively. In the first arrangement, there are no monitoring and incentive problems because each household is a residual claimant , but this arrangement sacrifices possible gains from economies of scale and risk sharing. In the collective arrangement , the gains and losses are just the opposite of those of the individual household arrangement