Abstract:The present study is an attempt to develop empirical evidence of transaction costs that rice farmers incur in production and other factors that affect farmers' demand for seed and estimating the proportion of costs accounted for by transaction costs due to quality seed in the formal and informal sectors, and analyze how these costs affect sourcing decision. An agricultural household model was developed from the study area. To test the model, information was collected in a survey of 387 households. There is now empirical evidence that transaction cost in rice seed acquisition in Tanzanian agriculture is an added cost to the farmer in the process of purchasing seed. Descriptive analysis shows that about 18% of the total seed cost is accounted for transaction cost, which is 2% of the total variable cost in farmers' rice farming. Econometric model was fitted to the household data to determine the factors hindering farmers to use purchased quality seed. Factors that were significant in influencing transaction cost include information search, seed source, farmers' seed arrangements, trust, and distance from farmers' homestead to the seed source, location and age of the farmer. We recommend that, policy amendments inclined towards reduction of the transaction costs can improve the profitability of the rice enterprise by increasing the demand for inputs.