Jurnal Ekonomi dan Studi Pembangunan, 13(2), 2021 ISSN 2086-1575 E-ISSN 2502-7115 169 Transaction Cost of Black Market in the Region Timor-Leste Border Kamilaus Konstanse Oki, Natalia Lily Babulu Faculty of Economics and Business, Universitas Timor, Indonesia E-mail: okitance@gmail.com Received: June 03, 2021; Revised: October 18, 2021; Accepted: November 9, 2021 Permalink/DOI: http://dx.doi.org/10.17977/um002v13i22021p169 Abstract Timor-Leste’s cross-border trade involves the people of the two countries on the border. Cross-border trade, which was originally facilitated by the government of Indonesia and East Timor by providing a common border market, has been closed since the Covid-19 pandemic. As a consequence, illegal transaction activities continue around the border with an unconventional approach and run outside the control of the state. The study aims to determine the effect of transaction costs, institutional changes, black markets on the welfare of people in border areas directly or indirectly. Explanatory research is a method approach used with PLS (Partial Least Square). The results of the study show that the direct relationship between constructs is positive, except that the transaction cost on welfare is negative. The indirect effect of transaction costs and institutional changes on welfare through the black market is positive. The factor of low transaction costs and changes in people’s behavior and income causes the trading process to be outside the government’s permit. Another supporting factor is the ease of accessibility in the form of proximity to mileage, means of transportation, and the similarity of economic needs. Black market practice is unlawful, and the state loses revenue. Keywords: Transaction Cost, Institutional Change, Black Market, Welfare JEL Classification: D60, F10 INTRODUCTION The majority of border communities in Timor-Leste are dryland farmers with a slash-and-burn and nomadic livelihood pattern. Orientation of agricultural crops for household consumption and minimal market expansion. As a result, people’s income is limited in meeting basic needs and other wants. The side effect is over exploitation of resources and impacts on social comfort and security in border areas. In relation to the situation and characteristics of poverty so that it does not become more acute, the government then places poverty as one of the fundamental problems and becomes the center of attention for prevention. Since Timor-Leste chose to become independent as a sovereign state, the border area has experienced a shift in value as a strategic area from an economic and political perspective (Rato, 2019). In the economic field, border areas are the